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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 2001
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001
COMMISSION FILE NUMBER 0-25347
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dELiA*s CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3963754
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
435 HUDSON STREET, NEW YORK, NEW YORK 10014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(212) 807-9060
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this FORM 10-K. /X/
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 8, 2001 was $117,560,000.
The number of shares outstanding of the registrant's Class A common stock as
of March 13, 2001 was 38,339,213.
The number of shares outstanding of the registrant's Class B common stock as
of March 13, 2001 was 11,425,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement pursuant to
Regulation 14A, which statement will be filed not later than 120 days after the
end of the fiscal year covered by this Report, are incorporated by reference in
Part III hereof.
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STATEMENTS CONTAINED IN THIS DOCUMENT OR INCORPORATED BY REFERENCE,
INCLUDING, WITHOUT LIMITATION, INFORMATION APPEARING UNDER
"PART I--ITEM 1--BUSINESS" AND "PART I--ITEM 7--MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY BE
FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE AMENDED
SECURITIES ACT OF 1933 AND SECTION 21E OF THE AMENDED SECURITIES EXCHANGE ACT OF
1934). THE WORDS "BELIEVE," "PLAN," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS
OF THE DATE OF THIS REPORT. THESE STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO: THE CONDITION OF THE FINANCIAL MARKETS
GENERALLY; ACCESS TO FINANCING TO FUND THE OPERATIONS AND THE EXPANSION
STRATEGIES OF OUR BUSINESS; FUTURE CONDITIONS OF THE MARKET FOR OUR CLASS A
COMMON STOCK; THE RISK THAT THE RECENT RECOMBINATION OF ITURF INC. AND
dELiA*s INC. WILL NOT PRODUCE SAVINGS FROM ADDITIONAL OPERATING EFFICIENCIES IN
A TIMELY FASHION OR AT ALL; COSTS RELATED TO THE MERGER AND CERTAIN
RESTRUCTURING INITIATIVES, INCLUDING THE DISCONTINUATION OF TSI SOCCER'S RETAIL
OPERATIONS; OUR ABILITY TO REDUCE EXPENSES SUCCESSFULLY; THE RISK THAT COST
REDUCTION INITIATIVES MAY LEAD TO REDUCED SERVICE LEVELS OR PRODUCT QUALITY,
WHICH COULD HAVE AN ADVERSE IMPACT ON REVENUES; THE EFFECT OF THE ADVERSE MARKET
CONDITIONS FOR ACQUISITIONS OF INTERNET CONTENT BUSINESSES ON OUR ABILITY TO
DIVEST OUR GURL BUSINESS IN A TIMELY MANNER, ON SATISFACTORY TERMS OR AT ALL;
INCREASES IN THE COST OF MATERIALS, PRINTING, PAPER, POSTAGE, SHIPPING AND
LABOR; TIMING AND QUANTITY OF CATALOG AND ELECTRONIC MAILINGS; RESPONSE RATES;
OUR ABILITY TO LEVERAGE INVESTMENTS MADE IN INFRASTRUCTURE TO SUPPORT EXPANSION;
AVAILABILITY OF ACCEPTABLE STORE SITES AND LEASE TERMS; ABILITY TO OPEN NEW
STORES IN A TIMELY FASHION; POSSIBILITY OF INCREASING COMPARABLE STORE SALES;
ADVERSE WEATHER CONDITIONS AND OTHER FACTORS AFFECTING RETAIL STORES GENERALLY;
THE ABILITY OF OUR COMPUTER SYSTEMS TO SCALE WITH GROWTH IN ONLINE TRAFFIC;
DIFFICULTY IN INTEGRATING NEW TECHNOLOGIES; OUR ABILITY TO RETAIN KEY PERSONNEL;
LEVELS OF COMPETITION; GENERAL ECONOMIC CONDITIONS; CHANGES IN CONSUMER SPENDING
PATTERNS; OUR ABILITY TO ANTICIPATE AND RESPOND TO FASHION TRENDS; OUR
DEPENDENCE ON THIRD PARTIES; AND OTHER FACTORS DETAILED ELSEWHERE IN THIS
REPORT. THESE FACTORS, AND OTHER FACTORS THAT APPEAR IN THIS DOCUMENT INCLUDING,
WITHOUT LIMITATION, UNDER "RISK FACTORS," COULD AFFECT OUR ACTUAL RESULTS AND
COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY US OR ON OUR BEHALF. WE UNDERTAKE NO
OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE ADVISED, HOWEVER,
TO CONSULT ANY ADDITIONAL DISCLOSURES WE MAKE IN OUR REPORTS TO THE SEC ON
FORMS 10-K, 10-Q AND 8-K.
THIS REPORT MAY INCLUDE OR INCORPORATE BY REFERENCE MARKET DATA RELATED TO
THE INDUSTRIES IN WHICH WE ARE INVOLVED. THIS DATA HAS BEEN DERIVED FROM STUDIES
PUBLISHED BY MARKET RESEARCH FIRMS, TRADE ASSOCIATIONS AND OTHER ORGANIZATIONS.
THESE ORGANIZATIONS SOMETIMES ASSUME EVENTS, TRENDS AND ACTIVITIES WILL OCCUR
AND PROJECT INFORMATION BASED ON THOSE ASSUMPTIONS. IF ANY OF THEIR ASSUMPTIONS
ARE WRONG, THEIR PROJECTIONS MAY ALSO BE WRONG.
IN MAY 1999, WE ANNOUNCED A CHANGE IN OUR FISCAL YEAR TO THE 52 OR 53 WEEKS
ENDED ON THE SATURDAY CLOSEST TO JANUARY 31 FOLLOWING THE CORRESPONDING CALENDAR
YEAR. REFERENCES IN THIS REPORT TO "FISCAL 2000" MEAN THE PERIOD FROM
JANUARY 30, 2000 TO FEBRUARY 3, 2001. REFERENCES TO "FISCAL 1999" MEAN THE
PERIOD FROM FEBRUARY 1, 1999 TO JANUARY 29, 2000. ANY REFERENCE IN THIS REPORT
TO A PARTICULAR FISCAL YEAR BEFORE 1999 IS TO THE YEAR ENDED JANUARY 31
FOLLOWING THE CORRESPONDING CALENDAR YEAR. FOR EXAMPLE, "FISCAL 1998" MEANS THE
PERIOD FROM FEBRUARY 1, 1998 TO JANUARY 31, 1999.
ON NOVEMBER 20, 2000, dELiA*s INC. WAS RECOMBINED WITH ITS MAJORITY-OWNED
SUBSIDIARY, ITURF INC., AND WE RENAMED THE PARENT COMPANY OF THE RECOMBINED
BUSINESS dELiA*s CORP. THE MERGER TRANSACTION WAS ACCOUNTED FOR AS A PURCHASE BY
dELiA*s INC. OF THE MINORITY INTEREST IN ITURF. AS A RESULT, THE HISTORICAL
FINANCIAL STATEMENTS OF dELiA*s CORP. CONTAINED HEREIN ARE THE HISTORICAL
FINANCIAL STATEMENTS OF dELiA*s INC. WITH EARNINGS PER SHARE RESTATED TO REFLECT
THE TRANSACTION. SEE NOTE 1 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Through our catalogs, retail stores and Web sites, we market apparel,
accessories and home furnishings, as well as other goods and services, primarily
to teen girls and young women.
FISCAL 2000 MERGER AND RESTRUCTURING. During fiscal 2000, dELiA*s Inc. and
iTurf Inc. were recombined and we renamed the parent company of the resulting
business dELiA*s Corp. We also announced our intention to focus on our core
dELiA*s brand and to sell or shut down our other businesses. In connection with
our merger and restructuring, we undertook a number of initiatives that are
described in detail under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As a result of our merger and restructuring initiatives, our reportable
segments have changed, as described in Note 5 to our consolidated financial
statements. We currently have two reportable segments: dELiA*s Direct (which
includes the operations of our dELiA*s catalog and our dELiAs.cOm e-commerce
site) and dELiA*s Retail. In fiscal 2000, dELiA*s Direct provided 45% of our
consolidated net sales, dELiA*s Retail provided 21% and our non-core businesses
represented the remaining 34%.
CONSOLIDATED SALES. The following table sets forth the principal product
categories that represent more than 10% of fiscal 2000 consolidated net sales:
Apparel..................................................... 64%
Footwear.................................................... 11
Accessories and soccer equipment*........................... 10
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* We do not expect soccer equipment to represent a significant product
category after fiscal 2000 due to the recent sale and liquidation,
respectively, of our TSI Soccer direct and retail businesses.
MERCHANDISING. Our dELiA*s catalogs, retail stores and e-commerce
pages feature a broad assortment of merchandise, ranging from basics, such as
jeans, shorts and t-shirts, to more fashion oriented apparel and accessories,
such as woven and knit junior dresses, swimwear, sunglasses, watches, costume
jewelry and cosmetics, to enable our customers to fulfill many of their fashion
needs. dELiA*s also offers home furnishings, light furniture and household
articles to teen girls and young women. While we continue to offer recognized
and emerging brands purchased from third-party vendors, we also continue to
increase our focus dELiA*s-branded merchandise that we source directly from
manufacturers or purchase from third-party vendors for sale under the "dELiA*s"
label. We present merchandise in coordinated groupings to encourage customers to
create outfits, which we believe increases average purchase size and enhances
sales.
CATALOG AND INTERNET OFFERINGS. In fiscal 2000, dELiA*s catalog circulation
was nearly 41 million. Our distinctive catalogs and dELiAs.cOm Web site include
detailed product descriptions and specifications, full color photographs and
pricing information. They are designed to create a unique and entertaining
shopping experience and to offer customers more than the typical apparel catalog
or Web site by combining the feel and editorial flair of a magazine or web/zine
with the convenience of at-home shopping.
We mail our catalogs to persons listed in our proprietary database, as well
as to persons from rented lists. We believe we can leverage our proprietary
database to develop additional targeted mailings to specific customer segments,
and may expand our strategy of more frequent mailings of supplemental catalogs
to repeat customers.
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RETAIL STORES. As of February 3, 2001, we operated 35 dELiA*s-branded
stores, including our four outlet stores. Our 31 full-priced dELiA*s stores
range in size from 2,500 to 5,100 square feet with an average size of 3,900
square feet. They are located primarily on the East Coast (Connecticut,
Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island,
Virginia) and Midwest (Illinois).
Our retail stores have point-of-sale terminals that transmit information
daily on sales by item, color and size. We evaluate this information, together
with weekly merchandise statistics reports, when making merchandising decisions
regarding reorders of fast-selling items and merchandise allocations.
PROPRIETARY DATABASE DEVELOPMENT. Except for our September 1998 purchase of
approximately 6 million names from the estate of Fulcrum Direct, Inc., we have
historically developed our proprietary customer database primarily through
referrals, word-of-mouth, catalog request cards, on-line membership programs and
targeted classified advertising in selected magazines, including SEVENTEEN and
YM. During fiscal 2000, approximately 1.2 million new names were added to our
database through such channels. As of February 3, 2001, our proprietary database
included approximately 12 million names, approximately 7 million of which were
customers. Our database contains a person's name, gender, residence, age, family
status and historical transaction data (including, among other things, referral
source, history of orders, payment method, average order size and product
purchase information). Whenever possible, we also gather additional demographic
data and e-mail addresses.
CALL CENTER OPERATIONS. We provide our dELiA*s Direct customers with
around-the-clock toll-free telephone access. Teleservice representatives process
orders directly into our management information system. These representatives
are versed in product sizes, colors and features and are trained to cross-sell
accessories and related products and provide information about promotional
items.
We believe our customers are particularly sensitive to the way merchants and
salespeople communicate with them. We strive to hire energetic, service-oriented
teleservice representatives who can understand and relate to our customers.
Our New York call center is flexibly configured to handle up to 300 phone
stations. Our approximately 300 (as of February 3, 2001) full- and part-time
teleservice representatives have the capacity to handle nearly 3,000 calls per
hour. We also use an outside teleservices provider for overflow calls. We
process telephone orders in an average of 4 to 5 minutes, depending upon the
nature of the order and whether the customer is a first-time or repeat customer.
Inquiries received by our customer service representatives are principally
concerned with order and refund status. Customer service representatives are
carefully screened, specially trained and often promoted from within based on
level of product knowledge, service ability and order accuracy.
DISTRIBUTION AND FULFILLMENT. Our customer orders and retail stock
shipments are processed through our warehouse and fulfillment center in Hanover,
Pennsylvania. From this center, we processed an average in fiscal 2000 of 10,000
customer shipments per day and handled nearly 28,000 packages on our busiest day
in the peak holiday season. We use an integrated picking, packing and shipping
system with a live connection to our direct order entry and retail systems. The
system monitors the in-stock status of each item ordered, processes orders and
retail stock requests and generates warehouse selection tickets and packing
slips for order and retail stock fulfillment operations.
A majority of our catalog and Internet orders are shipped within 48 hours of
credit approval. In cases in which the order is placed using another person's
credit card and it exceeds a specified threshold, the order is shipped only
after we have received confirmation from the cardholder. Customers generally
receive orders within three to ten business days after shipping. Our shipments
are generally carried to customers by United Parcel Service, the United States
Postal Service or Airborne Express.
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As of April 16, 2001, the dELiA*s Direct channel had approximately $400,000
in backorders, an improvement as compared to approximately $900,000 on that date
in 2000.
For fiscal 2000, merchandise returns were approximately 16.6% of shipped
sales in our dELiA*s Direct segment and 7.5% of sales in our dELiA*s Retail
segment. Return experience is closely monitored to identify trends in product
offerings, product defects and quality issues.
INVENTORY LIQUIDATION. We have excess inventory in varying degrees over the
course of the year. We mail sale catalogs, run promotional sales of excess items
and sell excess inventory through our outlet stores and discount Web site. We
have also used third-party liquidators, event sales and charitable donations to
dispose of excess inventory and may consider other liquidation options in the
future.
ACQUISITION. On February 15, 2000, we acquired TheSpark.com, Inc. As part
of our fiscal 2000 restructuring initiatives, we decided to dispose of the
TheSpark.com businesses and completed the sale in the first quarter of fiscal
2001. The terms of the acquisition and more details regarding the sale are
provided under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INTELLECTUAL PROPERTY
We have registered the dELiA*s name, stylized logo and daisy symbol, among
other trademarks, with the U.S. Patent and Trademark Office. We use the
trademarks, tradenames, logos and endorsements of our suppliers with their
permission. While we do from time to time receive notices of alleged
infringement of other people's intellectual property rights, we are not aware of
any pending material conflicts concerning our marks or our use of others'
intellectual property.
COMPETITION
Our industry is highly competitive and we expect competition to increase. We
compete with traditional department stores, as well as specialty retailers, for
teen and young adult customers. We also compete with other direct marketers and
other e-commerce companies, some of which may specifically target our customers.
Many of our competitors are larger than us and have substantially greater
financial, distribution and marketing resources. Increased competition could
result in pricing pressures, increased marketing expenditures and loss of market
share. We believe our success will depend, in part, on our ability to adapt to
new technologies and to respond to competitors' actions in these areas.
EMPLOYEES
As of February 3, 2001, we had approximately 1,500 employees. None of our
employees are represented by a collective bargaining unit. We consider our
relations with our employees to be good.
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RISK FACTORS
THE FOLLOWING PRINCIPAL RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT BY PROSPECTIVE
INVESTORS OR CURRENT STOCKHOLDERS EVALUATING AN INVESTMENT IN OUR COMMON STOCK.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR
COMPANY AND OUR STOCKHOLDERS. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO
ADVERSELY IMPAIR OUR BUSINESS OPERATIONS. IN ADDITION, ACTUAL RESULTS OF OUR
BUSINESS COULD DIFFER MATERIALLY FROM THOSE DESCRIBED AS A RESULT OF THE
FOLLOWING RISK FACTORS AND THOSE DESCRIBED IN THE SECTION ENTITLED
"ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, AND ADDITIONAL
CAPITAL COULD DILUTE STOCKHOLDERS
Historically, we have financed our business operations primarily through the
sale of equity and bank loans. We believe that available cash on hand and
available borrowings will enable us to maintain our currently planned
operations. However, in the event of lower than expected sales or higher than
expected expenses or in the event of material changes to our vendor payment
terms, it is likely that we will need to raise additional funds to finance our
operations. We are currently in compliance with the covenants of our credit
agreement with Congress Financial Corporation and have received a waiver from
Allfirst Bank of the financial covenant in our mortgage loan agreement. However,
if our business was to deteriorate and we were to fail to comply with the
financial covenants under our credit agreement, we may not continue to have
access to these sources of funding. In addition, we are likely to require
additional financing in order to expand our retail operations beyond our current
plans. As an alternative to bank financing, we may seek an equity-based
investment from a strategic or financial partner. Debt or equity financing may
not be available in sufficient amounts or on terms acceptable to us, or at all,
and any equity-based financing would be dilutive to our current stockholders.
HISTORICAL RESULTS MAY NOT BE INDICATIVE OF FUTURE RESULTS DUE TO SEASONAL,
CYCLICAL AND QUARTERLY FLUCTUATIONS
We experience seasonal and cyclical fluctuations in our revenues and results
of operations. For example, sales of apparel, accessories and footwear are
generally lower in the first half of each year. In addition, due to the cyclical
nature of our businesses and our sensitivity to consumer spending patterns,
purchases of apparel and accessories tend to decline during recessionary periods
and may decline at other times. Consequently, our results of operations from
quarter to quarter may not be comparable.
Our quarterly results may also fluctuate as a result of a number of other
factors, including:
- general economic conditions;
- changes in consumer spending patterns;
- changes in the growth rate of Internet usage and online user traffic
levels;
- the timing and amount of costs relating to the expansion of our operations
and acquisitions of technology or businesses;
- increases in the cost of materials, printing, paper, postage, shipping and
labor;
- the timing, quantity and cost of catalog and electronic mailings and
response rates to those mailings;
- market acceptance of our merchandise, including new merchandise categories
or products introduced, and online content and community offerings;
- opportunities to expand, including the ability to locate and obtain
acceptable store sites and lease terms or renew existing leases, and the
ability to increase comparable store sales;
- levels of competition;
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- the timing of merchandise deliveries;
- adverse weather conditions, changes in weather patterns and other factors
affecting retail stores; and
- other factors outside our control.
As a result of seasonal and cyclical patterns and the other factors
described above, you should not rely on quarter-to-quarter comparisons of our
results of operations as indicative of our future performance. In addition, it
is possible that in some future periods our results of operations may be below
the expectations of public market analysts and investors, which could adversely
affect our stock price.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR
BUSINESS
RETAIL STORES. We opened the first full-priced dELiA*s-brand retail store
in February 1999, and many of the dELiA*s-brand retail stores were opened after
fiscal 1999. As a result, we do not have substantial data regarding comparable
store sales, which is an important measure of performance for a retail company.
Because of our limited history as an operator of retail stores and the limited
data available for management, as well as potential investors, to assess the
trends in individual store performance, there can be no assurances of our
ability to run these stores profitably. In addition, failure to expand the
numbers of dELiA*s retail stores will limit our ability to leverage our
infrastructure and would have a material adverse effect on our financial
condition and results of operations.
As a result of these factors, our future revenues are difficult to forecast.
Any shortfall in revenues may have a material adverse effect on our business and
would likely affect the market price of our Class A common stock in a manner
unrelated to our long-term operating performance.
E-COMMERCE. We did not begin selling merchandise from the dELiA*s catalog
on the Internet until May 1998. As a result, our Internet business has generated
substantially all of its revenues since that time. You must consider the risks
and difficulties that we will encounter as an early-stage company in the new and
rapidly evolving e-commerce market. These risks include our ability to:
- maintain and enhance our systems to support growth of operations and
increasing user traffic;
- retain existing customers, attract new customers and maintain customer
satisfaction;
- introduce new and enhanced Web pages, services, products and alliances;
- minimize technical difficulties, system downtime and the effect of
Internet brown-outs;
- manage the timing of promotions and sales programs;
- respond to technological changes in the industry; and
- respond to changes in government regulation.
If we do not successfully manage these risks, our business will be materially
adversely affected. We cannot assure you that we will successfully address these
risks or that our business strategy will be successful.
WE ARE PARTY TO CLASS ACTION LITIGATION
We are currently party to two purported class action litigations. The first
was originally filed in two separate complaints in Federal District Court for
the Southern District of New York in 1999 against dELiA*s Inc. and certain of
its officers and directors. These complaints were consolidated. The consolidated
complaint alleges, among other things, that the defendants violated Rule 10b-5
under the
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Securities Exchange Act of 1934 by making material misstatements and by failing
to disclose certain allegedly material information regarding trends in the
business during part of 1998. The second was originally filed as three separate
complaints in Delaware Chancery Court against iTurf Inc., dELiA*s Inc. and each
of iTurf's directors in connection with the recombination of the iTurf Inc. and
dELiA*s Inc. businesses. The actions were consolidated and an amended complaint
was filed on January 19, 2001. The complaint alleges that dELiA*s and the
members of the iTurf board of directors have breached their fiduciary duties to
iTurf's public stockholders and that the exchange ratio was unfair to iTurf's
public stockholders. This complaint seeks class certification and other
equitable and monetary relief, including enjoining the merger or awarding
damages.
We believe that the allegations are without substantial merit and intend to
vigorously contest these actions. However, we can not predict at this time the
outcome of any litigation or whether the resolution of the litigation could have
a material adverse effect on our business.
OUR GROWTH STRATEGY MAY PRESENT OPERATIONAL, MANAGEMENT AND INVENTORY CHALLENGES
Our historical growth has placed significant demands on our management and
other administrative, operational and financial resources. We intend to continue
to pursue a growth-oriented strategy in our core dELiA*s business for the
foreseeable future and our future operating results will largely depend on our
ability to open and operate new retail stores, appropriately expand our Internet
e-commerce business and manage a larger core dELiA*s business. Managing this
growth will require us to continue to implement and improve our operations and
financial and management information systems and to continue to expand, motivate
and effectively manage our workforce. If we cannot manage this process
effectively or grow our businesses as planned, we may not achieve our desired
future operating results.
Operation of a greater number of retail stores, expansion into new
geographic or demographic markets and online expansion may present competitive
and merchandising challenges that are different from those we currently
encounter in our existing businesses. Such expansion will also require further
investment in infrastructure and marketing for our direct and retail businesses.
This investment will increase our operating expenses, which could have a
material adverse effect on the results of our business if anticipated sales do
not materialize, and may require us to seek additional capital. There can be no
assurance that we will be able to obtain this financing on acceptable terms or
at all.
In addition, expansion of our retail and e-commerce businesses within our
existing markets may adversely affect the individual financial performance of
existing stores or catalog sales. Historically, efforts to increase Internet
sales have reduced catalog sales. There can be no assurance that increased sales
through our retail stores will not reduce catalog or Internet sales. Also, new
stores may not achieve sales and profitability levels consistent with existing
stores.
Furthermore, as our sales increase, we anticipate maintaining higher
inventory levels. This anticipated increase in inventory levels will expose us
to greater risk of excess inventories and inventory obsolescence, as well as
increase our dependence on our vendors and exposure to their payment terms, all
of which could have a material adverse effect on our business.
WE MAY FAIL TO ANTICIPATE AND RESPOND TO FASHION TRENDS AND THE TASTES OF OUR
CUSTOMERS
Our failure to anticipate, identify or react to changes in styles, trends or
brand preferences of our customers may result in lower revenue from reduced
sales and promotional pricing. Our success depends, in part, on our ability to
anticipate the frequently-changing fashion tastes of our customers and to offer
merchandise and services that appeal to their preferences on a timely and
affordable basis. If we were to misjudge our offerings, our image with our
customers would be materially adversely affected. Poor customer reaction to our
products or our failure to source these products effectively would have a
material adverse effect on our business.
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WE RELY ON THIRD-PARTY VENDORS FOR MERCHANDISE
Our business depends on the ability of third-party vendors to provide us
with current-season, brand-name apparel and merchandise at competitive prices,
in sufficient quantities and of acceptable quality. No vendor accounted for more
than 2% of our core dELiA*s sales in fiscal 2000. We do not have long-term
contracts with any supplier and are not likely to enter into these contracts in
the foreseeable future. In addition, many of the smaller vendors that we use
have limited resources, production capacities and operating histories. As a
result, we are subject to the following risks, which could have a material
adverse effect on our business:
- our key vendors may fail or be unable to expand with us;
- we may lose one or more key vendors;
- our current vendor terms may be changed to require increased payments in
advance of delivery, and we may not be able to fund such payments through
our current credit facility; or
- our ability to procure products may be limited.
It is our current strategy to increase the percentage of our goods designed
and manufactured to our specifications and to source this merchandise from
independent factories. To the extent we concentrate our sourcing with fewer
manufacturers, we may increase our exposure to failed or delayed deliveries,
which could have a material adverse effect on our business.
Furthermore, as part of our move towards more private-label merchandise, we
are likely to source an increasing proportion of our goods from factories in the
Far East and Latin America. These goods will be subject to existing or potential
duties, tariffs or quotas that may limit the quantity of some types of goods
which may be imported into the United States from countries in those regions. We
will increasingly compete with other companies for production facilities and
import quota capacity. Sourcing more merchandise abroad will also subject our
business to a variety of other risks generally associated with doing business
abroad, such as political instability, currency and exchange risks and local
political issues. Our future performance will be subject to these factors, which
are beyond our control. Although a diverse domestic and international market
exists for the kinds of merchandise sourced by us, there can be no assurance
that these factors would not have a material adverse effect on our results of
operations. We believe that alternative sources of supply would be available in
the event of a supply disruption in one or more regions of the world. However,
we do not believe that, under current circumstances, entering into committed
alternative supply arrangements is warranted, and there can be no assurance that
alternative sources would in fact be available at any particular time.
OUR CHIEF EXECUTIVE OFFICER HOLDS SUBSTANTIAL EQUITY IN THE COMPANY AND MAY USE
HIS INFLUENCE IN WAYS THAT ARE NOT CONSISTENT WITH THE INTERESTS OF OTHER
STOCKHOLDERS
Stephen I. Kahn, our chief executive officer, holds or has the right to vote
in the aggregate approximately 32% of our Class A common stock, net of treasury
stock and stock held by subsidiaries. Accordingly, Mr. Kahn may have substantial
influence over the company and may exercise his influence in ways that might not
be consistent with the interests of other stockholders.
WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING KEY PERSONNEL
Our success will depend on the continued service of our key technical, sales
and senior management personnel. Loss of the services of our senior management
personnel, including Stephen I. Kahn, Chairman of our board of directors and
Chief Executive Officer, Christopher C. Edgar, Vice Chairman, Evan Guillemin,
President, and Dennis Goldstein, Chief Financial Officer, or other key employees
would have a material adverse effect on our business.
9
Competition for employees in our industries is intense. As a result, we have
in the past experienced, and we expect to continue to experience, difficulty
hiring and retaining skilled employees with appropriate qualifications.
WE MAY NOT BE ABLE TO ATTRACT NEW CUSTOMERS TO REPLENISH OUR CUSTOMER BASE
Our customers are primarily teens and young adults. As these individuals age
beyond their teens, they may no longer purchase products aimed at younger
individuals. Accordingly, we must constantly update our marketing efforts to
attract new, prospective teen and young adult customers. Failure to attract new
customers would have a material adverse effect on our business.
OUR CATALOG RESPONSE RATES MAY DECLINE
Catalog response rates usually decline when we mail additional catalog
editions within the same fiscal period. Response rates also decline in
geographic regions where we open new stores. As we open additional new stores,
we expect aggregate catalog response rates to decline further. In addition, as
we continue to increase the number of catalogs distributed or mail our catalogs
to a broader group of new potential customers, we have observed that these new
potential customers respond at lower rates than existing customers have
historically responded. These trends in response rates have had and are likely
to continue to have a material adverse effect on our rate of sales growth and on
our profitability and could have a material adverse effect on our business.
OUR INDUSTRIES ARE HIGHLY COMPETITIVE
The apparel and accessories industry is highly competitive, and we expect
competition to increase. As a result of this competition, we may experience
pricing pressures, increased marketing expenditures and loss of market share,
which would have a material adverse effect on our business.
We compete with traditional department stores, as well as specialty
retailers, for teen and young adult customers. We also compete with other direct
marketers and e-commerce companies, some of which may specifically target our
customers; we expect competition from e-commerce companies to continue to
increase because of the relative ease with which new Web sites can be developed.
In addition, because there are few barriers to entry in the teen apparel and
accessories market, we could face competition from manufacturers of apparel and
accessories, including our current vendors, who could market their products
directly to retail customers or make their products more readily available in
competitor catalogs, Web sites and retail stores.
We cannot assure you that we will be able to compete successfully with these
companies or that competitive pressures will not materially and adversely affect
our business. We believe that our ability to compete depends upon many factors,
including the following:
- the market acceptance of our e-commerce site;
- the success of our brand building and sales and marketing efforts;
- the performance, price and reliability of services developed by us or our
competitors; and
- the effectiveness of our customer service and support efforts.
Many of our competitors are larger and have substantially greater financial,
distribution and marketing resources than us. Our competitors may develop
products or services that are equal or superior to, or achieve greater market
acceptance than, ours. Our competitors could also enter into exclusive
distribution arrangements with our vendors and deny us access to these vendors'
products. These factors may have a material adverse effect on our business.
10
THE EXPECTED BENEFITS OF OUR RECENT MERGER MAY NOT BE REALIZED
The success of the recent recombination of our Internet, catalog and retail
businesses will depend, in part, on our ability to realize growth opportunities
and synergies from combining the businesses of the two companies. Although we
expect the merger to affect our stockholders positively, we may not realize the
anticipated benefits of the merger. We believe that we will reduce some
administrative overhead costs by combining the two companies, but these savings
are not expected to have a material effect on our results of operations.
Moreover, some of the synergies we hope to exploit are strategic and, by nature,
speculative. For example, we hope to improve catalog productivity through
targeted e-mails, but there is no definitive evidence that targeted e-mails will
improve our sales productivity or allow us to distribute fewer catalogs.
WE RELY ON INFORMATION AND TELECOMMUNICATIONS SYSTEMS, WHICH ARE SUBJECT TO
DISRUPTION
The success of our direct marketing and retail store businesses depends, in
part, on our ability to provide prompt, accurate and complete service to our
customers on a competitive basis, and to purchase and promote products, manage
inventory, ship products, manage sales and marketing and maintain efficient
operations through our telephone and management information systems. In
addition, the success of our e-commerce business depends, in part, on our
ability to provide a consistently prompt and user-friendly experience to our
customers, with a minimum of technical delays or disruptions.
Our operations therefore depend on our ability to maintain our computer and
telecommunications systems and equipment in effective working order. Any
sustained or repeated system failure or interruption would have a material
adverse effect on sales and customer relations.
Unanticipated problems affecting our systems have caused from time to time
in the past, and in the future could cause, disruptions in our services. These
system interruptions could result from the failure of our telecommunications
providers to provide the necessary data communications capacity in the time
frame we require or from events such as fire, power loss, water damage,
telecommunications failures, vandalism and other malicious acts, and similar
unexpected adverse occurrences. Any damage or failure that interrupts or delays
our operations could have a material adverse effect on our business.
STRIKES OR OTHER SERVICE INTERRUPTIONS AFFECTING THIRD-PARTY SHIPPERS WOULD
IMPACT OUR ABILITY TO DELIVER MERCHANDISE ON A TIMELY BASIS
We rely on third-party shippers, including the United States Postal Service,
United Parcel Service and Airborne Express, to ship merchandise to our
customers. Strikes or other service interruptions affecting our shippers would
affect our ability to deliver merchandise on a timely basis and could have a
material adverse effect on our business.
WE DEPEND ON THE STORAGE OF PERSONAL INFORMATION ABOUT OUR CUSTOMERS, AND
PROPOSED LEGISLATION MAY LIMIT OUR ABILITY TO CAPTURE AND USE SUCH CUSTOMER
INFORMATION
Web sites typically place identifying data, or "cookies," on a user's hard
drive without the user's knowledge or consent. dELiAs.cOm and other Web sites
use cookies for a variety of reasons, including the collection of data derived
from the user's Internet activity. Any reduction or limitation in the use of
cookies could limit the effectiveness of our sales and marketing efforts.
Most currently available Web browsers allow users to remove cookies at any
time or to prevent cookies from being stored on their hard drives. In addition,
some commentators, privacy advocates and governmental bodies have suggested
limiting or eliminating the use of cookies. Furthermore, the European Union
recently adopted a directive addressing data privacy that may limit the
collection and
11
use of information regarding Internet users. Any of these actions may limit our
ability to collect and use information about our customers, which could have a
material adverse effect on our business.
Recently, there has been increasing public concern regarding the
compilation, use and distribution of information about teens and children.
Federal legislation has been introduced in the U.S. Congress that proposes
restrictions on persons, principally list brokers, that sell, purchase or
otherwise use for commercial purposes personal information about teens under the
age of 16 and children. List brokerage is not currently a material part of our
business but we do market to persons whose names are derived from purchased or
rented lists. We may increase our use of purchased and rented lists or, in the
future, decide to increase our list brokerage business. Consequently, the
proposed legislation, or other similar laws or regulations that may be enacted,
could impair our ability to collect customer information, use that information
in the course of our business or profit from future plans to sell customer
information, which could have a material adverse effect on our business.
WE MAY BECOME SUBJECT TO CURRENCY, POLITICAL, TAX AND OTHER UNCERTAINTIES AS WE
EXPAND INTERNATIONALLY
We distribute our dELiA*s catalogs in Japan and Canada and plan to explore
distribution opportunities in other international markets. Our dELiAs.cOm Web
site are visited by a global audience. Our international business is subject to
a number of risks of doing business abroad, including:
- fluctuations in currency exchange rates;
- the impact of recessions in economies outside the United States;
- regulatory and political changes in foreign markets;
- reduced protection for intellectual property rights in some countries;
- potential limits on the use of some of our vendors' trademarks outside the
United States;
- exposure to potentially adverse tax consequences or import/ export quotas;
- opening and managing distribution centers abroad;
- inconsistent quality of merchandise and disruptions or delays in shipping;
and
- difficulties in developing customer lists and marketing channels.
Furthermore, expansion into new international markets may present
competitive and merchandising challenges different from those we currently face.
We cannot assure you that we will expand internationally or that any such
expansion will result in profitable operations.
WE MAY BE REQUIRED TO COLLECT SALES TAX
At present, we do not collect sales or other similar taxes in respect of
direct shipments of goods to consumers into most states. However, various states
have sought to impose state sales tax collection obligations on out-of-state
direct mail companies. A successful assertion by one or more states that we
should have collected or be collecting sales taxes on the direct sale of our
merchandise would have a material adverse effect on our business.
WE MAY NOT BE ADEQUATELY PROTECTED AGAINST INFRINGEMENT OF OUR INTELLECTUAL
PROPERTY, WHICH IS ESSENTIAL TO OUR BUSINESS
We regard our service marks, trademarks, trade secrets and similar
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality, license and other
agreements with employees, customers, strategic partners and others to protect
our proprietary rights, and have also pursued and applied for the registration
of our trademarks and service marks in the United States. The steps we have
taken to protect our intellectual property may not be
12
adequate, and third parties may infringe or misappropriate our copyrights,
trademarks and similar proprietary rights. In addition, effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our products and services are made available.
WE MAY BECOME SUBJECT TO LIABILITY FOR INFRINGING THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS
From time to time we receive complaints that we have infringed on
third-party intellectual property rights. Our reliance on independent vendors
makes it difficult to guard against infringement and we have occasionally agreed
to refrain from selling some merchandise at the request of third parties
alleging infringement. To date, these claims have not had a material adverse
effect on our business. However, future infringement claims, if directed at key
items of our merchandise or our material intellectual property, could have a
material adverse effect on our business.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN POSTAGE AND PAPER
EXPENSES
Significant increases in paper or catalog delivery costs would have a
material adverse effect on our business.
THE PRICE OF OUR CLASS A COMMON STOCK COULD BE EXTREMELY VOLATILE
The market price of our Class A common stock has fluctuated in the past and
may continue to be volatile. In the past, companies that have experienced
volatility in the market price of their stock have been the objects of
securities class action litigation, which could have material adverse effects on
our business.
DELAWARE LAW AND OUR ORGANIZATIONAL DOCUMENTS AND STOCKHOLDER RIGHTS PLAN MAY
INHIBIT A TAKEOVER
Provisions of Delaware law, our Restated Certificate of Incorporation or our
bylaws could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders.
In addition, our board of directors has adopted a stockholder rights plan,
the purpose of which is to protect stockholders against unsolicited attempts to
acquire control of us that do not offer a fair price to all of our stockholders.
The rights plan may have the effect of dissuading a potential acquirer from
making an offer for our Class A common stock at a price that represents a
premium to the then current trading price.
WE MAY BE EXPOSED TO POTENTIAL LIABILITY OVER PRIVACY CONCERNS
Despite the display of our privacy policy on our dELiAs.cOm Web site, any
penetration of our network security or misappropriation of our customers'
personal or credit card information could subject us to liability. We may be
liable for claims based on unauthorized purchases with credit card information,
impersonation or other similar fraud claims. Claims could also be based on other
misuses of personal information, such as for unauthorized marketing purposes.
These claims could result in litigation, which could divert management's
attention from the operation of our business and result in the imposition of
significant damages.
In addition, the Federal Trade Commission and several states have
investigated the use by Internet companies of personal information. In 1998, the
U.S. Congress enacted the Children's Online Privacy Protection Act of 1998. The
Federal Trade Commission recently promulgated final regulations interpreting
this act. We depend upon collecting personal information from our customers and
we believe that the regulations under this act will make it more difficult for
us to collect personal information from some of our customers. Any failure to
comply with this act may make us liable for substantial fines and other
penalties. We could also incur expenses if new regulations regarding the use of
personal information are introduced or if our privacy practices are
investigated.
13
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD CREATE ADDITIONAL BURDENS TO
DOING BUSINESS ON THE INTERNET
Laws and regulations applicable to Internet communications, commerce and
advertising are becoming more prevalent. The adoption or modification of laws or
regulations applicable to the Internet could adversely affect our business. The
law governing the Internet, however, remains largely unsettled.
Although our online transmissions generally originate in New York, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. It may
take years to determine whether and how existing laws governing intellectual
property, privacy, libel and taxation apply to the Internet. In addition, the
growth and development of online commerce may prompt calls for more stringent
consumer protection laws, both in the United States and abroad. We also may be
subject to regulation not specifically related to the Internet, including laws
affecting direct marketers and advertisers. The interpretation or enactment of
any of these types of laws or regulations may impose burdens on our business.
THIRD-PARTY INTERNET PROVIDERS MAY EXPERIENCE SYSTEM FAILURES THAT COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our customers depend on Internet service providers and Web site operators
for access to our Web site. Some of these groups have experienced significant
outages in the past and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. These types of occurrences
could cause customers to perceive our Web site as not functioning properly and
therefore cause them to stop using our e-commerce services, which could have a
material adverse effect on our business.
A DECREASE IN THE GROWTH OF WEB USAGE OR INADEQUATE INTERNET INFRASTRUCTURE
WOULD ADVERSELY AFFECT OUR BUSINESS
The Internet industry is new and rapidly evolving. A decrease in the growth
of Web usage would have a material and adverse effect on our business. Some of
the factors that may inhibit growth in Web usage are:
- inadequate Internet infrastructure;
- security and privacy concerns;
- inconsistent quality of service; and
- unavailability of cost-effective, high-speed service.
The success of our dELiAs.cOm Web site depends upon the ability of the
Internet infrastructure to support increased use. The performance and
reliability of the Web may decline as the number of users increases or the
bandwidth requirements of users increase. The Web has experienced a variety of
outages due to damage to portions of its infrastructure. If outages or delays
frequently occur in the future, Web usage, including usage of our dELiAs.cOm Web
site, could grow slowly or decline. Even if the necessary infrastructure or
technologies are developed, we may have to spend considerable amounts to adapt
our solutions accordingly.
WEB SECURITY CONCERNS COULD HINDER ONLINE COMMERCE
The need to transmit confidential information such as credit card and other
personal information securely over the Internet has been a significant barrier
to online commerce. Any publicized compromise of security could deter people
from accessing the Web or from using it to transmit confidential information.
These security concerns could reduce our market for online commerce. We
14
may also incur significant costs to protect ourselves against the threat of
problems caused by security breaches.
THE LOSS OF OR CHANGE IN OUR DOMAIN NAME COULD RESULT IN A REDUCTION IN BRAND
AWARENESS AMONG OUR CUSTOMERS
The regulation of domain names in the United States and in foreign countries
is expected to change in the near future. As a result, we cannot assure you that
we will be able to acquire or maintain our dELiAs.cOm Internet domain name in
all countries in which we conduct business, which could reduce brand awareness
among our customers.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights. Any such inability could have a material adverse
effect on our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO SELL THE GURL BUSINESS IN A TIMELY MANNER OR AT PRICES WE
CONSIDER APPROPRIATE
We plan to sell our gURL Internet community property. We do not expect that
the proceeds from a sale will be material. However, if we fail to sell the gURL
business in a timely manner, the operating losses of that business will
adversely affect our consolidated results of operations and cash flows.
15
ITEM 2. PROPERTIES
The following table sets forth information regarding our principal
facilities, excluding retail stores. Except for the property in Hanover, PA,
which we purchased during fiscal 1999, all such facilities are leased. We
believe our facilities are well maintained and in good operating condition.
APPR. SQ. LEASE
LOCATION USE FOOTAGE EXPIRATION DATE
- -------- ----------------------------------------- --------- ---------------
New York, NY............... Corporate offices 45,000 2007
New York, NY*.............. iTurf offices 25,000 2011
Long Island City, NY....... Call center 25,000 2010
Warehouse, fulfillment and distribution
Hanover, PA................ center 400,000 --
Foster City, CA*........... Storybook Heirlooms offices 20,000 2001
Hayward, CA*............... Storybook Heirlooms distribution center 33,000 2003
- ------------------------
* In connection with our restructuring efforts, we are currently negotiating
to terminate these leases or to sublet the space.
ITEM 3. LEGAL PROCEEDINGS
In 1999, two separate purported securities class action lawsuits were filed
against dELiA*s Inc., certain of its officers and directors and one former
officer of a subsidiary. The original complaints were filed in Federal District
Court for the Southern District of New York by Allain Roy on June 1, 1999 and by
Lorraine Padgett on June 3, 1999. The suits were consolidated into a single
class action and an amended and consolidated complaint was filed on March 22,
2000. The complaint in this lawsuit purports to be a class action on behalf of
the purchasers of our securities during the period January 20, 1998 through
September 10, 1998. The complaint generally alleges that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
by making material misstatements and by failing to disclose certain allegedly
material information regarding trends in our business. The complaint also
alleges that the individual defendants are liable for those violations under
Section 20(a) of the Securities Exchange Act. The complaint seeks unspecified
damages, attorneys' and experts' fees and costs, and such other relief as the
court deems proper. On April 14, 2000, dELiA*s Inc. and the other named
defendants filed a motion to dismiss the lawsuit. The motion to dismiss was
denied on March 26, 2001. We intend to vigorously defend against this action.
While an estimate of the possible range of loss can not be made, based upon
information presently known to management, we do not believe that the ultimate
resolution of this lawsuit will have a material adverse effect on our business.
Between August 17 and August 25, 2000, three purported class action
complaints on behalf of a subsidiary's stockholders were filed in Delaware
Chancery Court against the subsidiary, dELiA*s Inc. and each of the subsidiary's
directors. These actions include: Pack v. Kahn, et al., Del. Ch., C.A.
No. 18242NC, Semeraro v. Kahn, et al., Del. Ch., C.A. No. 18258, and Engel v.
Kahn, et al., Del. Ch., C.A. No. 18260NC. All three complaints made virtually
identical claims, alleging that dELiA*s Inc. and the members of the subsidiary's
board of directors breached their fiduciary duties to the subsidiary's public
stockholders and that the merger exchange ratio was unfair to the subsidiary's
public stockholders. The actions were consolidated and an amended complaint was
filed on January 19, 2001. This complaint seeks class certification and other
equitable and monetary relief, including enjoining the merger or awarding
damages. On April 3, 2001, we filed a motion to dismiss the lawsuit. Although we
believe that the allegations of the complaint are without substantial merit and
intend to vigorously contest this action, we can not predict at this time the
outcome of any litigation or the possible range of loss or whether the
resolution of the litigation could have a material adverse effect on our
business.
16
In the first quarter of fiscal 2001, we were served with a purported class
action complaint alleging that we improperly collected sales tax from residents
of New York State. We intend to vigorously defend against this action. While an
estimate of the possible range of loss can not be made, based upon information
presently known to management, we do not believe that the ultimate resolution of
this lawsuit will have a material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SPECIAL MEETING OF ITURF INC.
A special meeting in lieu of an annual meeting of stockholders of
iTurf Inc. was held on November 17, 2000, for the purpose of considering and
voting upon the following matters:
(i) a proposal to approve and adopt the Agreement and Plan of Merger, dated
as of August 16, 2000, as amended October 12, 2000, among iTurf Inc.,
iTurf Breakfast Corp. and dELiA*s Inc. pursuant to which each
outstanding share of common stock of dELiA*s Inc. would be converted
into 1.715 shares of Class A common stock of iTurf Inc.
(ii) an amendment to iTurf's certificate of incorporation through which:
a. iTurf would increase the number of authorized shares of iTurf's
common stock and designate additional shares of Class A common stock,
b. iTurf would change its name to dELiA*s Corp., and
c. iTurf would provide that, upon any transfer of shares of iTurf's
Class B common stock, the transferred shares will lose their voting
rights, unless the transfer is first approved by a majority of
iTurf's outstanding shares entitled to vote.
(iii) An amendment to iTurf's 1999 Amended and Restated Stock Incentive Plan
to provide for automatic increases in 2002 and 2003 of the number of
shares of iTurf's Class A common stock authorized to be issued under
that plan.
(iv) The re-election of Christopher C. Edgar and Evan Guillemin as Class A
directors of iTurf.
(v) The ratification of the appointment of Ernst & Young LLP as iTurf's
independent auditors.
(vi) Authority to vote on such other business as may properly come before
the meeting.
Management solicited proxies pursuant to Regulation 14 under the Securities
Exchange Act of 1934. There was no solicitation in opposition to management's
proposals and nominees, and all such proposals were adopted and nominees
elected.
With respect to the proposal to approve and adopt the Agreement and Plan of
Merger, the number of shares of common stock voted was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- -------- -------- ----------------
73,203,206 122,215 6,600 3,306,649
With respect to the proposal to amend the Certificate of Incorporation of
iTurf, the number of shares of common stock voted was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- -------- -------- ----------------
73,173,109 135,586 22,426 3,306,649
17
With respect to the proposal to amend iTurf's 1999 Amended and Restated
Stock Incentive Plan, the number of shares of common stock voted was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---------- -------- -------- ----------------
72,755,340 554,366 21,415 3,306,649
With respect to the re-election of Mr. Edgar and Mr. Guillemin as Class A
directors of iTurf, the number of shares of common stock voted was as follows:
DIRECTOR FOR AGAINST ABSTAIN
- -------- ---------- -------- --------
Christopher C. Edgar.......................... 76,691,655 120,252 289,647
Evan Guillemin................................ 76,702,305 109,502 289,647
The terms of office of directors Thomas R. Evans, Stephen I. Kahn, Bruce
Nelson, Timothy U. Nye, Beth Vanderslice and Douglas R. Platt continued after
the meeting.
With respect to the ratification of the appointment of Ernst & Young LLP as
iTurf's independent auditors, the number of shares of common stock voted was as
follows:
FOR AGAINST ABSTAIN
- ---------- -------- --------
76,735,756 113,323 252,475
With respect to authority to vote on other business as may properly come
before the meeting, the number of shares of common stock voted was as follows:
FOR AGAINST ABSTAIN
- ---------- -------- --------
76,465,195 325,956 310,403
18
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since our November 20, 2000 merger, our Class A common stock has traded on
the NASDAQ National Market under the symbol DLIA. Prior to that date,
iTurf Inc. Class A common stock was traded on the NASDAQ National Market under
the symbol TURF while dELiA*s Inc. common stock was traded on the NASDAQ
National Market under the symbol DLIA. The following table sets forth the high
and low sales prices as reported by NASDAQ for the periods indicated for dELiA*s
Corp. Class A common stock since the merger and iTurf Inc. Class A common stock
prior to November 20, 2000. These quotations reflect interdealer prices without
adjustments for retail markups, markdowns or commissions and may not necessarily
represent actual transactions.
HIGH LOW
-------- --------
FISCAL YEAR ENDED JANUARY 29, 2000
1st Quarter............................................. $66.000 $26.000
2nd Quarter............................................. 41.125 13.250
3rd Quarter............................................. 15.375 9.438
4th Quarter............................................. 24.250 9.875
FISCAL YEAR ENDED FEBRUARY 3, 2001
1st Quarter............................................. $ 13.75 $ 4.313
2nd Quarter............................................. 5.375 2.500
3rd Quarter............................................. 3.625 0.625
4th Quarter............................................. 3.719 0.500
On April 16, 2001, there were 208 holders of record of our common stock and
approximately 7,000 beneficial owners of our common stock.
DIVIDEND INFORMATION
Since inception, we have neither declared nor paid any cash dividends on our
common stock. We currently intend to retain our earnings for future growth and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future. Our credit agreement with Congress Financial Corporation prohibits us
from paying dividends.
SALES OF UNREGISTERED SECURITIES IN THE FOURTH QUARTER OF FISCAL 2000
None.
19
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below has been derived from our
consolidated financial statements. The following selected data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto appearing elsewhere in this report. All applicable information has been
restated to give effect to our 1996 conversion from a limited liability company
to a C corporation in connection with our initial public offering and our
December 1997 acquisition of TSI Soccer Corporation, which was accounted for as
a pooling of interests. Pro forma net income is computed for fiscal 1996 to
reflect the effect of pro forma tax provisions related to our 1996 conversion to
a C corporation. In addition, all net income (loss) per share amounts for
periods prior to the November 2000 merger of dELiA*s Inc. and iTurf Inc. have
been retroactively adjusted to reflect the merger exchange ratio by multiplying
the number of dELiA*s Inc. shares by 1.715.
FISCAL 1996 FISCAL 1997 FISCAL 1998 FISCAL 1999 FISCAL 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales............................. $54,224 $113,049 $158,364 $190,772 $215,065
Cost of sales......................... 28,291 57,811 78,368 108,148 119,258
------- -------- -------- -------- --------
Gross profit.......................... 25,933 55,238 79,996 82,624 95,807
Selling, general and administrative
expenses............................ 22,194 47,943 71,711 124,339 155,503
Merger and restructuring charges...... 1,614 -- 23,668 29,205
Gain on subsidiary IPO and sale of
subsidiary stock.................... -- -- (78,117) --
Minority interest..................... -- -- (4,865) (20,812)
Other expense (income), net........... (103) (1,201) (962) (2,429) (316)
------- -------- -------- -------- --------
Income (loss) before income taxes..... 3,842 6,882 9,247 20,028 (67,773)
Provision (benefit) for income
taxes............................... (351) 2,456 3,405 9,070 11,942
------- -------- -------- -------- --------
Net income (loss)..................... $ 4,193 $ 4,426 $ 5,842 $ 10,958 $(79,715)
======= ======== ======== ======== ========
Basic net income (loss) per share..... $ 0.23 $ 0.20 $ 0.25 $ 0.45 $ (2.98)
======= ======== ======== ======== ========
Diluted net income (loss) per share... $ 0.23 $ 0.20 $ 0.24 $ 0.42 $ (2.98)
======= ======== ======== ======== ========
Pro forma net income (loss)........... $ 2,257
-------
Pro forma basic and diluted net income
(loss) per share.................... $ 0.13
=======
Shares used in the calculation of
basic net income (loss) per share... 17,968 22,194 23,631 24,550 26,744
======= ======== ======== ======== ========
Shares used in the calculation of
diluted net income (loss) per
share............................... 18,005 22,437 24,555 26,377 26,744
======= ======== ======== ======== ========
BALANCE SHEET DATA AT END OF FISCAL
YEAR:
Cash and cash equivalents............. $21,717 $ 4,485 $ 10,981 $ 24,985 $ 10,121
Working capital....................... 19,099 37,959 25,480 83,952 14,082
Total assets.......................... 32,660 64,572 82,144 184,040 85,043
Total stockholders' equity............ 21,024 44,144 63,607 82,921 20,156
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"ITEM 6--SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. EXCEPT FOR THE HISTORICAL
INFORMATION PRESENTED, THE DISCUSSION IN THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE
IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND
UNDER "ITEM 1--BUSINESS--RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS REPORT.
OVERVIEW
Through our catalogs, retail stores and Web sites, we market apparel,
accessories and home furnishings, as well as other goods and services, primarily
to teen girls and young women.
MERGER, RESTRUCTURING AND OTHER NON-CASH CHARGES. During fiscal 2000,
dELiA*s Inc. and iTurf Inc. merged and we announced our intention to focus on
our core dELiA*s brand and to sell or shut down our non-core businesses. The
restructuring of our businesses included the following initiatives:
- the recombination of dELiA*s Inc. and iTurf Inc., in order to allow us,
among other things, to manage the catalog and e-commerce components of our
dELiA*s Direct business segment better;
- the completion of the shutdown of our Screeem! and Jean Country retail
stores in accordance with our fiscal 1999 plan;
- the liquidation of our Droog direct business, which we substantially
completed in fiscal 2000;
- the sale on February 1, 2001 of substantially all of the assets of our TSI
Soccer direct business;
- the sale on April 26, 2001 of the primary assets of our Storybook
Heirlooms direct business;
- the liquidation of the retail operations of TSI Soccer, which we expect to
complete in the first half of fiscal 2001; and
- the decision to exit our Internet community businesses, shutting down our
OnTap business and iTurf.com Web site in fiscal 2000 and marketing our
gURL and TheSpark.com businesses for sale; we completed the sale of the
TheSpark.com businesses on March 19, 2001; we expect to complete the
disposition of gURL in the second quarter of fiscal 2001.
On November 20, 2000, iTurf Inc. and dELiA*s Inc. were recombined through
the merger of dELiA*s Inc. into a wholly-owned subsidiary of iTurf Inc. We
issued 1.715 shares of iTurf Class A common stock to dELiA*s Inc. stockholders
for each outstanding share of dELiA*s Inc. common stock surrendered in the
merger. All outstanding dELiA*s Inc. options and restricted stock were converted
at the same exchange ratio. We renamed the parent company of the recombined
business dELiA*s Corp. Because the former stockholders of dELiA*s Inc. owned
more than 50% of dELiA*s Corp. after the merger, the transaction was accounted
for as a "reverse acquisition" by dELiA*s Inc. of the minority interest in
iTurf. In connection with the merger, deferred tax liabilities relating to
earlier issuances of iTurf common stock were eliminated and the remaining net
deferred tax asset was reserved with a current period tax charge of
$19.8 million. The excess of the net assets acquired over the merger
consideration, after the writeoff of the minority interest proportionate
percentage of iTurf's noncurrent assets and an adjustment relating to our fiscal
2000 restructuring initiatives, was recorded as $20.7 million of "excess of fair
value over purchase price" that will be amortized over five years.
21
As a result of the "reverse acquisition" treatment, dELiA*s Corp. reports
the historical results of dELiA*s Inc. for periods prior to the merger with all
share and per share information, except for amounts on our Consolidated Balance
Sheets and Consolidated Statements of Stockholders' Equity, retroactively
adjusted to reflect the merger exchange ratio by multiplying the number of
dELiA*s Inc. shares by 1.715. In presenting our shares outstanding and
calculating loss per share for periods after the merger, we have assumed
conversion on the merger date of all eligible shares of dELiA*s Inc. common
stock.
As a result of our merger and restructuring initiatives, our reportable
segments have changed. We currently have two reportable segments: dELiA*s Direct
(which includes the operations of our dELiA*s catalog and our dELiAs.cOm
e-commerce site) and dELiA*s Retail. See Note 5 to our consolidated financial
statements for disclosure of results by reportable segment.
In connection with our merger and restructuring initiatives, we have
recorded a net charge of $52.3 million, which is recorded as $29.2 million of
merger and restructuring charges, a $19.8 million income tax charge and
$3.3 million in cost of sales. During the first half of fiscal 2001, we expect
to record additional restructuring charges for severance costs relating to the
discontinued Internet community properties and the wind down and sale of the
Storybook Heirlooms business.
We also recorded $17.8 million of other significant non-cash charges during
fiscal 2000:
- $11.5 million for depreciation and amortization;
- $4.6 million for compensation expense relating to the issuance of
restricted stock; and
- $1.7 million for the writeoff of fixed assets and other non-cash corporate
charges.
THESPARK.COM, INC. On February 15, 2000, we acquired TheSpark.com, Inc. The
aggregate consideration paid consisted of newly issued shares of a subsidiary's
Class A common stock and the right to receive additional consideration of up to
$13.5 million in cash and/or stock in fiscal years 2001 and 2000 based on the
achievement of certain performance goals. The transaction was accounted for
under the purchase method of accounting with the results of operations included
in our income statement from the date of acquisition and the excess of the
aggregate purchase price over the fair market value of net assets acquired of
$14.1 million allocated to goodwill. The goodwill was assigned a five-year life
for amortization. In connection with this issuance of a subsidiary's common
stock, we recorded $2.8 million as additional paid-in capital.
On January 12, 2001, we entered into an agreement with representatives of
the former stockholders of TheSpark.com, Inc. to amend our contingent
obligations under the acquisition agreement. In exchange for a release from the
original contingent obligations, we paid the former stockholders of
TheSpark.com, Inc. $2.5 million in February 2001 and are obligated to issue to
them on June 1, 2001 up to 2.0 million shares, subject to partial reduction for
appreciation in the market value, of our Class A common stock. We also paid them
$1.7 million in connection with our March 2001 sale of the TheSpark.com
businesses. Finally, we agreed to pay them additional consideration of
$1.5 million in cash or stock (at our option) in the first quarter of fiscal
2002.
CAPITAL INVESTMENTS. We have made and continue to make significant capital
expenditures for construction of our dELiA*s retail stores. Our current plan is
to open 10 dELiA*s retail stores during fiscal 2001, with related capital
expenditures totaling $3.0 million.
GENERAL MATTERS AFFECTING OUR CORE dELiA*s BUSINESS. The operating results
of our ongoing dELiA*s business are subject to the following uncertainties, each
of which is described in more detail under "Risk Factors" above:
- access to financing to fund the operations and the expansion strategies of
our business;
22
- our ability to anticipate and respond to fashion trends;
- timing and quantity of catalog and electronic mailings and customer
response rates;
- availability of acceptable store sites and lease terms and the possibility
of increasing comparable store sales; and
- other factors described in "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of items from our Consolidated Statement of Operations to net
sales. Any trends reflected by the following table may not be indicative of
future results.
PERCENTAGE OF NET SALES
---------------------------------------
FISCAL 1998 FISCAL 1999 FISCAL 2000
----------- ----------- -----------
Net sales................................................... 100.0% 100.0% 100.0 %
Cost of sales............................................... 49.5 56.7 55.4
----- ----- -----
Gross profit................................................ 50.5 43.3 44.6
Selling, general and administrative expenses................ 45.3 65.2 72.3
Merger and restructuring charges............................ -- 12.4 13.6
Gain on subsidiary IPO and sale of subsidiary stock......... -- (40.9) --
Minority interest........................................... -- (2.6) (9.7)
Interest and other income, net.............................. (0.6) (1.3) (0.1)
----- ----- -----
Income (loss) before income taxes........................... 5.8 10.5 (31.5)
Provision (benefit) for income taxes........................ 2.1 4.8 5.6
----- ----- -----
Net income (loss)........................................... 3.7% 5.7% (37.1)%
===== ===== =====
COMPARISON OF FISCAL YEARS 1999 AND 2000
NET SALES. Net sales increased 12.7% to $215.1 million in fiscal 2000 from
$190.8 million in fiscal 1999. The increase is primarily due to increases in our
core dELiA*s-branded businesses, with increases of $28.2 million and
$11.0 million in dELiA*s Retail and dELiA*s Direct, respectively. The increase
in net sales in our dELiA*s Retail segment is primarily due to 14 new store
openings and the increase in net sales in our dELiA*s Direct segment is
primarily due to higher sales per catalog mailed. These increases were offset by
decreases in our non-core businesses of $14.9 million, with a significant
portion of that decrease relating to the closure of our Screeem! retail chain.
GROSS MARGIN. Gross margin increased to 44.6% in fiscal 2000 from 43.3% in
fiscal 1999. The increase is even greater when restructuring-related cost of
sales charges of $3.3 million and $500,000 in fiscal 2000 and fiscal 1999,
respectively, are excluded. The change represents significant improvements in
both segments of our core dELiA*s-branded business. Gross margins for these
segments improved more than 440 basis points on a combined basis to 47.8% in
fiscal 2000 from 43.4% in fiscal 1999 due primarily to strong full price
selling, particularly in the holiday season, as well as an increase in the
proportion of our product that is being sold under the higher-margin dELiA*s
label. These improvements were partially offset by gross margin declines in our
non-core businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $31.2 million, to
$155.5 million or 72.3% of net sales in fiscal 2000 from $124.3 million or 65.2%
of net sales in fiscal 1999. The increase primarily relates to our Internet and
other non-core businesses, in particular to the increase in goodwill
amortization associated with our acquisitions of
23
Internet businesses. In our dELiA*s-branded businesses, increases at dELiA*s
Retail of $13.0 million, relating to the addition of 14 new stores, were
partially offset by decreases at dELiA*s Direct in excess of $3.0 million.
MERGER AND RESTRUCTURING CHARGES. During fiscal 2000, we recorded primarily
non-cash charges of $29.2 million relating to our decision to focus exclusively
on our core dELiA*s-branded business and the related merger. During fiscal 1999,
we recorded a charge of $23.7 million in connection with our plans to close our
Screeem! and Jean Country retail operations. These charges are in addition to
the related charges included in cost of sales and income taxes.
GAIN ON SUBSIDIARY IPO AND SALE OF SUBSIDIARY STOCK. In connection with the
April 1999 iTurf initial public offering, we recognized a one-time pre-tax gain
of approximately $70.1 million. During the fourth quarter of fiscal 1999, we
recorded an additional $8.0 million pre-tax gain on our sale of 1,075,000 shares
of iTurf stock for cash.
MINORITY INTEREST. For the period that iTurf Inc. was not wholly-owned by
dELiA*s, we reflected the outside ownership of iTurf as minority interest.
INTEREST AND OTHER INCOME, NET. Interest and other income decreased to
$300,000 in fiscal 2000 from $2.4 million in fiscal 1999 due to the sale of
marketable securities, increased interest expense due to additional borrowings
and a one-time loss in fiscal 2000 on an investment in an Internet business.
INCOME TAXES. In accounting for the November 2000 merger of dELiA*s Inc.
and iTurf Inc., deferred tax liabilities relating to earlier issuances of iTurf
common stock were eliminated and the remaining net deferred tax asset was
reserved with a current period non-cash tax charge of $19.8 million.
COMPARISON OF FISCAL YEARS 1998 AND 1999
NET SALES. Net sales increased approximately $32.4 million, from
$158.4 million in fiscal 1998 to $190.8 million in fiscal 1999. The increase was
a result of new stores, new catalog titles and the growth in Internet sales,
some of which was a shift from our catalog channel.
GROSS MARGIN. Gross margin decreased from 50.5% in fiscal 1998 to 43.3% in
fiscal 1999. The decrease in gross margin was primarily due to greater markdowns
and increased promotions at dELiA*s and iTurf, liquidations at our Screeem!
stores in connection with our restructuring and increased freight costs. The
decrease also reflects a cost of sales charge of $500,000 in fiscal 1999
relating to our Screeem! restructuring.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $52.6 million, from
$71.7 million in fiscal 1998 to $124.3 million in fiscal 1999. Selling, general
and administrative expenses increased as a percentage of net sales from 45.3% in
fiscal 1998 to 65.2% in fiscal 1999. The increase in selling, general and
administrative expenses was primarily due to expansion of our Internet and
retail businesses, as well as expenses for greater catalog circulation. In
addition, lower dELiA*s catalog sales were not accompanied by a direct reduction
in expenses.
RESTRUCTURING CHARGE. During fiscal 1999, we recorded a charge of
approximately $23.7 million in connection with our plans to close our Screeem!
and Jean Country retail operations. These charges are in addition to the
$500,000 restructuring-related charge included in cost of sales.
GAIN ON SUBSIDIARY IPO AND SALE OF SUBSIDIARY STOCK. In connection with the
April 1999 iTurf initial public offering, we recognized a one-time pre-tax gain
of approximately $70.1 million. During the fourth quarter of fiscal 1999, we
recorded an additional $8.0 million pre-tax gain on our sale of 1,075,000 shares
of iTurf stock for cash.
24
MINORITY INTEREST. For the period that iTurf Inc. was not wholly-owned by
dELiA*s, we reflected the outside ownership of iTurf as minority interest.
INTEREST AND OTHER INCOME, NET. The significant increase in interest and
other income from $1.0 million in fiscal 1998 to $2.4 million in fiscal 1999
relates to the purchase of marketable securities with the proceeds of the iTurf
initial public offering, offset in part by increased interest expense due to
additional borrowings.
INCOME TAXES. The increase in our effective income tax rate from 37% of
pre-tax income in fiscal 1998 to 45% of pre-tax income in fiscal 1999 relates
primarily to iTurf losses. Although iTurf was consolidated in the dELiA*s Inc.
fiscal 1999 financial statements for reporting purposes, iTurf was not included
in our consolidated group for tax purposes from the time of its initial public
offering in April 1999 until the November 2000 merger, and the deferred tax
assets arising from its net operating loss for that period were fully reserved.
25
SELECTED QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
FISCAL QUARTER ENDED
--------------------------------------------------------------------------------------------
MAY 1, JULY 31, OCT. 30, JAN. 29, APRIL 29, JULY 29, OCT. 28, FEB. 3,
1999 1999 1999 2000 2000 2000 2000 2001
-------- --------- --------- --------- ---------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales......................... $ 41,812 $33,375 $48,085 $67,500 $ 49,057 $ 37,295 $ 52,332 $ 76,381
Cost of sales..................... 23,023 20,450 25,776 38,899 25,792 21,122 29,089 43,255
-------- ------- ------- ------- -------- -------- -------- --------
Gross profit...................... 18,789 12,925 22,309 28,601 23,265 16,173 22,243 33,126
Selling, general and
administrative expenses......... 23,750 23,908 32,395 44,286 39,003 35,142 38,183 43,174
Restructuring charge.............. 22,907 -- -- 761 -- -- 20,641 8,564
Gain on subsidiary IPO and sale of
subsidiary stock................ (70,091) -- (8,026) -- -- -- --
Minority interest................. 8 (493) (2,125) (2,255) (3,901) (4,687) (11,823) (401)
Interest and other income, net.... (140) (1,027) (703) (559) (667) (414) 184 581
-------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 42,355 (9,463) (7,258) (5,606) (11,170) (13,869) (23,942) (18,792)
Provision (benefit) for income
taxes*.......................... 17,519 (3,399) (1,257) (3,793) (2,424) (3,376) 18,729 (987)
-------- ------- ------- ------- -------- -------- -------- --------
Net income (loss)................. $ 24,836 $(6,064) $(6,001) $(1,813) $ (8,746) $(10,493) $(42,671) $(17,805)
======== ======= ======= ======= ======== ======== ======== ========
Per share data:
Basic net income (loss) per
share........................... $ 1.02 $ (0.25) $ (0.24) $ (0.07) $ (0.35) $ (0.42) $ (1.71) $ (0.55)
======== ======= ======= ======= ======== ======== ======== ========
Diluted net income (loss) per
share........................... $ 0.91 $ (0.25) $ (0.24) $ (0.07) $ (0.35) $ (0.42) $ (1.71) $ (0.55)
======== ======= ======= ======= ======== ======== ======== ========
Shares used in calculation of
basic net income (loss) per
share........................... 24,406 24,576 24,597 24,621 24,873 24,928 24,928 32,247
Shares used in calculation of
diluted net income (loss) per
share........................... 27,382 24,576 24,597 24,621 24,873 24,928 24,928 32,247
PERCENTAGE OF NET SALES
--------------------------------------------------------------------------------------------
Net sales......................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales..................... 55.0 61.3 53.6 57.6 52.6 56.6 55.6 56.6
-------- ------- ------- ------- -------- -------- -------- --------
Gross profit...................... 45.0 38.7 46.4 42.4 47.4 43.4 44.4 43.4
Selling, general, administrative
and merger related expenses..... 56.8 71.6 67.4 65.6 79.5 94.2 73.0 56.5
Restructuring charge.............. 54.8 -- 1.1 -- -- 39.4 11.2
Gain on subsidiary IPO and sale of
subsidiary stock................ (167.6) -- -- (11.9) -- --
Interest and other income, net.... (0.3) (3.1) (1.5) (0.8) (1.4) (1.1) 0.3 0.8
Minority interest................. -- (1.5) (4.4) (3.3) (8.0) (12.5) (22.6) (0.5)
-------- ------- ------- ------- -------- -------- -------- --------
Income (loss) before income
taxes........................... 101.3 (28.3) (15.1) (8.3) (22.7) (37.2) (45.7) (24.6)
Provision (benefit) for income
taxes*.......................... 41.9 (10.2) (2.6) (5.6) (4.9) (9.1) 35.8 (1.3)
-------- ------- ------- ------- -------- -------- -------- --------
Net income (loss)................. 59.4 % (18.1)% (12.5)% (2.7)% (17.8)% (28.1)% (81.5)% (23.3)%
======== ======= ======= ======= ======== ======== ======== ========
- ------------------------------
* The income tax benefit for the fourth quarter of fiscal 1999 includes
significant adjustments to estimates booked earlier in fiscal 1999.
We experience seasonal and cyclical fluctuations in our revenues and results
of operations. For example, sales of apparel, accessories and footwear are
generally lower in the first half of each year. In addition, due to the cyclical
nature of our businesses and our sensitivity to consumer spending patterns,
purchases of apparel and accessories tend to decline during recessionary periods
and may decline at other times. Consequently, our results of operations from
quarter to quarter may become less comparable. Our quarterly results will also
be affected by the timing of catalog mailings and promotions and may also
fluctuate as a result of a number of other factors described in "Risk Factors."
As a result of seasonal and cyclical patterns and these other factors, you
should not rely on quarter-to-quarter comparisons of our results of operations
as indicative of our future performance.
26
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations was $37.0 million in fiscal 2000 compared to
$36.5 million in fiscal 1999. This change primarily relates to increased
operating losses in our non-core businesses partially offset by better
management of working capital.
Investing activities provided $21.8 million in fiscal 2000, primarily
relating to net proceeds from our investments offset by capital expenditures,
and used $65.0 million in fiscal 1999 for the purchase of marketable securities
and capital expenditures. During fiscal 2001, we expect to make capital
expenditures of approximately $4.0 million, primarily for the construction of
new retail stores.
Financing activities were not significant in fiscal 2000, while cash
provided by financing activities of $115.5 million in fiscal 1999 relate
primarily to the initial public offering of iTurf common stock and borrowings
under our credit facility.
In August 1999, in connection with the purchase of our distribution facility
in Hanover, Pennsylvania, we borrowed $5.3 million from Allfirst Bank in the
form of a seven-year mortgage loan on the property. We are subject to certain
covenants under the loan agreement, including a covenant to maintain a fixed
charge coverage ratio. On May 4, 2001, we received a waiver of the fixed charge
coverage ratio covenant through August 6, 2003 in exchange for our agreement to
make a principal payment of $2.0 million in May 2001 and to pay on August 6,
2003 the outstanding principal balance as of that date. The principal balance on
the mortgage was $5.3 million and $5.2 million as of January 29, 2000 and
February 3, 2001, respectively. Future mortgage principal payments, which
reflect our May 2001 agreement with Allfirst, are as follows: fiscal
2001--$2.1 million; 2002--$100,000; and 2003--$3.0 million.
On April 28, 2000, we entered into a three-year agreement with Congress
Financial Corporation that amended and restated the terms of our previous credit
agreement with First Union, the parent company of Congress. The Congress
facility, as subsequently amended in connection with our merger and
restructurings, consists of a revolving line of credit permitting us to borrow
up to $25 million, limited to specified percentages of the value of our eligible
inventory as determined under the credit agreement, and provides for the
issuance of documentary and standby letters of credit up to $10 million. Our
obligations under the agreement are secured by a lien on substantially all of
our assets, except certain real property and other specified assets. The
agreement contains certain covenants, with which we are in compliance, and
default provisions customary for credit facilities of this nature, including
limitations on our payment of dividends. The agreement also contains controls on
our cash management and certain limits on our ability to distribute assets. At
our option, borrowings under this facility bear interest at First Union National
Bank's prime rate plus 25 basis points or at LIBOR plus 225 basis points. A fee
of 0.375% per year is assessed monthly on the unused portion of the line of
credit. As of February 3, 2001, the remaining balance, which was classified as
current, was $2.4 million, outstanding letters of credit were $1.4 million and
unused available credit was $5.5 million. During fiscal 2000, the weighted
average interest rate incurred on our credit agreement was 9.5%.
We believe that our cash on hand and cash generated by operations, together
with the funds available under our credit agreement and cash generated from the
sale of assets, will be sufficient to meet our capital and operating
requirements through fiscal 2001. Our future capital requirements depend on
numerous factors, including, without limitation, the success of our marketing,
sales and distribution efforts. Additional funds, if required, may not be
available to us on favorable terms or at all.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to changes in interest rates primarily from our credit and
mortgage arrangements.
As of February 3, 2001, our investments are debt securities that are
classified as held-to-maturity and carried at amortized cost, which also
approximates market value based on quotes obtained from brokers for those
instruments. Because our intention is to hold these investment to maturity,
their value to us is not affected by changes in interest rates.
Until recently, an interest rate hedge offset our outstanding mortgage debt.
Therefore, we effectively paid a fixed interest rate on the mortgage and we were
not exposed to interest rate risk. Effective May 4, 2001, we agreed to make a
$2.0 million principal payment on the mortgage and terminated our interest rate
hedge. As a result, we are subject to interest rate fluctuations on the
remaining principal balance of the mortgage loan. However, based on the reduced
principal balance, a change of 100 basis points in interest rates would not have
a material effect on interest costs in fiscal 2001.
We are also affected by interest rate changes to the extent that fluctuating
rate loans are outstanding under our credit facility. Based on our outstanding
balance of $2.4 million at February 3, 2001, a hypothetical 100 basis point
increase in interest rates would not have a material effect on our interest
costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III (Items 10 through 13) is incorporated
by reference to the captions "Beneficial Ownership of Voting Securities,"
"Election of Directors," "Management" and "Certain Transactions" in our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of our
fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements on page F-1.
All schedules are omitted either because they are not applicable or the
required information is disclosed in the consolidated financial
statements or notes thereto.
(b) We filed the following reports on Form 8-K during the fourth quarter of
fiscal 2000:
(i) iTurf Inc. filed a current report on Form 8-K dated November 17,
2000 reporting Item 5. This report contained information relating to
iTurf's special meeting of its stockholders to approve the merger
with dELiA*s Inc.
(ii) dELiA*s Corp. filed a current report on Form 8-K dated December 4,
2000 reporting Item 2. This report contained information on the
merger of iTurf Inc. and dELiA*s Inc.
(iii) dELiA*s Corp. filed a current report on Form 8-K/A dated
December 11, 2000 reporting Item 7. This report contained
information on the merger of iTurf Inc. and dELiA*s Inc.
(iv) dELiA*s Corp. filed a current report on Form 8-K dated January 19,
2001 reporting Item 5. This report contained information on the
adoption of a Shareholder Rights Plan.
(c) See Exhibit Index immediately following Signature Page.
28
dELiA*s CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
REPORTS OF INDEPENDENT AUDITORS............................. F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of January 29, 2000 and
February 3, 2001.......................................... F-4
Consolidated Statements of Operations for the fiscal years
ended January 31, 1999, January 29, 2000 and February 3,
2001...................................................... F-5
Consolidated Statements of Stockholders' Equity for the
fiscal years ended January 31, 1999, January 29, 2000 and
February 3, 2001.......................................... F-6
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1999, January 29, 2000 and February 3,
2001...................................................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of dELiA*s Corp.
We have audited the accompanying consolidated balance sheets of dELiA*s
Corp. (the "Company") as of January 29, 2000 and February 3, 2001 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the fiscal years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
dELiA*s Corp. as of January 29, 2000 and February 3, 2001 and the consolidated
results of the Company's operations and cash flows for the fiscal years then
ended in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
New York, New York
March 20, 2001,
except for Notes 4, 9 and 14,
as to which the date is May 4, 2001
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of dELiA*s Inc.
New York, New York
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of dELiA*s Inc. and subsidiaries (the "Company") for the
fiscal year ended January 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the results of
operations and cash flows of dELiA*s Inc. and subsidiaries for the fiscal year
ended January 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
March 30, 1999
(April 14, 1999 as to Note 1 sentences 2 and 3)
New York, New York
F-3
dELiA*s CORP.
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 2000 AND FEBRUARY 3, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 29, 2000 FEBRUARY 3, 2001
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 24,985 $ 10,121
Short-term investments.................................... 32,893 11,024
Merchandise inventories................................... 28,322 19,974
Assets held for sale...................................... -- 3,334
Deferred tax assets....................................... 12,063 --
Prepaid expenses and other current assets................. 15,014 9,850
-------- --------
Total current assets.................................... 113,277 54,303
PROPERTY AND EQUIPMENT, NET................................. 35,483 30,145
LONG-TERM INVESTMENTS....................................... 11,024 --
GOODWILL AND OTHER ASSETS................................... 24,256 595
-------- --------
TOTAL ASSETS................................................ $184,040 $ 85,043
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 21,643 $ 27,080
Liabilities due to customers.............................. 2,278 4,570
Accrued restructuring..................................... 1,685 4,059
Bank loan payable......................................... 3,000 2,361
Other current liabilities................................. 719 2,151
-------- --------
Total current liabilities............................... 29,325 40,221
LONG-TERM DEBT AND CAPITAL LEASES........................... 6,756 4,770
DEFERRED TAX LIABILITIES.................................... 23,901 --
OTHER LONG-TERM LIABILITIES................................. 403 513
EXCESS OF FAIR VALUE OVER PURCHASE PRICE.................... -- 19,383
MINORITY INTEREST........................................... 40,734 --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; Authorized
shares--1,000,000; Issued shares--none.................. -- --
Common stock, par value $.01 per share; Authorized
shares--50,000,000; Issued shares--14,914,472 (including
551,046 in treasury) and none, respectively............. 149 --
Class A Common stock, par value $.01 per share; Authorized
shares--100,000,000; Issued shares--none and 38,267,035
(including 1,685,580 in treasury), respectively......... -- 383
Class B Common stock, par value $.01 per share; Authorized
shares--12,500,000; Issued shares--none and 11,425,000
(all in treasury), respectively......................... -- 114
Additional paid-in capital................................ 80,216 91,293
Less common stock in treasury, at cost.................... (17,734) (11,041)
Deferred compensation..................................... -- (1,168)
Retained earnings (deficit)............................... 20,290 (59,425)
-------- --------
Total stockholders' equity.............................. 82,921 20,156
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $184,040 $ 85,043
======== ========
See notes to consolidated financial statements.
F-4
dELiA*s CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 31, 1999, JANUARY 29, 2000 AND FEBRUARY 3, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL
------------------------------
1998 1999 2000
-------- -------- --------
NET SALES................................................... $158,364 $190,772 $215,065
COST OF SALES............................................... 78,368 108,148 119,258
-------- -------- --------
GROSS PROFIT................................................ 79,996 82,624 95,807
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 71,711 124,339 155,503
MERGER AND RESTRUCTURING CHARGES (Notes 1 and 4)............ -- 23,668 29,205
GAIN ON SUBSIDIARY IPO AND SALE OF SUBSIDIARY STOCK......... -- (78,117) --
MINORITY INTEREST........................................... -- (4,865) (20,812)
INTEREST AND OTHER INCOME, NET.............................. (962) (2,429) (316)
-------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. 9,247 20,028 (67,773)
PROVISION FOR INCOME TAXES.................................. 3,405 9,070 11,942
-------- -------- --------
NET INCOME (LOSS)........................................... $ 5,842 $ 10,958 $(79,715)
======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE........................... $ 0.25 $ 0.45 $ (2.98)
======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE......................... $ 0.24 $ 0.42 $ (2.98)
======== ======== ========
See notes to consolidated financial statements.
F-5
dELiA*s CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 31, 1999, JANUARY 29, 2000 AND FEBRUARY 3, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
dELiA*s INC. dELiA*s CORP. dELiA*s CORP.
COMMON STOCK CLASS A COMMON CLASS B COMMON ADDITIONAL
---------------------- --------------------- --------------------- PAID-IN TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK
----------- -------- ---------- -------- ---------- -------- ---------- --------
BALANCE, JANUARY 31, 1998......... 13,318,914 $ 133 -- -- -- -- $40,571 --
Deferred compensation............. -- -- -- -- -- -- -- --
Issuance of common stock for
acquisition..................... 817,501 8 -- -- -- -- 13,242 --
Exercise of stock options......... 49,010 1 -- -- -- -- 320 --
Net income........................ -- -- -- -- -- -- -- --
----------- ----- ---------- ---- ---------- ---- ------- --------
BALANCE, JANUARY 31, 1999......... 14,185,425 142 -- -- -- -- 54,133 --
Issuance of common stock for
acquisition..................... 5,000 -- -- -- -- -- 1,396 --
Issuance of subsidiary common
stock for acquisition........... -- -- -- -- -- -- 6,919 --
Cancellation of common stock...... (33,784) -- -- -- -- -- (608) --
Subsidiary purchase of
dELiA*s Inc. common stock....... 551,046 5 -- -- -- -- 17,729 $(17,734)
Exercise of stock options......... 206,785 2 -- -- -- -- 1,199 --
Tax effect of equity
transactions.................... -- -- -- -- -- -- (552) --
Net income........................ -- -- -- -- -- -- -- --
----------- ----- ---------- ---- ---------- ---- ------- --------
BALANCE, JANUARY 29, 2000......... 14,914,472 149 -- -- -- -- 80,216 (17,734)
Issuance of common stock in
connection with acquisitions.... 168,039 2 -- -- -- -- (2) --
Issuance of subsidiary common
stock for acquisition........... -- -- -- -- -- -- 2,802 --
Issuance of restricted stock,
net............................. 1,628,775 16 (87,978) $ (1) -- -- 2,760 --
Merger adjustments................ (16,714,786) $(167) 38,353,738 $384 11,425,000 $114 5,477 7,516
Deferred compensation............. -- -- -- -- -- -- -- --
Exercise of stock options......... 3,500 -- 1,275 -- -- -- 40 --
Stock repurchases................. -- -- -- -- -- -- -- (823)
Net loss.......................... -- -- -- -- -- -- -- --
----------- ----- ---------- ---- ---------- ---- ------- --------
BALANCE, FEBRUARY 3, 2001......... -- -- 38,267,035 $383 11,425,000 $114 $91,293 $(11,041)
=========== ===== ========== ==== ========== ==== ======= ========
RETAINED TOTAL
DEFERRED EARNINGS STOCKHOLDERS'
COMP. (DEFICIT) EQUITY
-------- --------- -------------
BALANCE, JANUARY 31, 1998......... $ (50) $ 3,490 $ 44,144
Deferred compensation............. 50 -- 50
Issuance of common stock for
acquisition..................... -- -- 13,250
Exercise of stock options......... -- -- 321
Net income........................ -- 5,842 5,842
------- -------- --------
BALANCE, JANUARY 31, 1999......... -- 9,332 63,607
Issuance of common stock for
acquisition..................... -- -- 1,396
Issuance of subsidiary common
stock for acquisition........... -- -- 6,919
Cancellation of common stock...... -- -- (608)
Subsidiary purchase of
dELiA*s Inc. common stock....... -- -- --
Exercise of stock options......... -- -- 1,201
Tax effect of equity
transactions.................... -- -- (552)
Net income........................ -- 10,958 10,958
------- -------- --------
BALANCE, JANUARY 29, 2000......... -- 20,290 82,921
Issuance of common stock in
connection with acquisitions.... -- -- --
Issuance of subsidiary common
stock for acquisition........... -- -- 2,802
Issuance of restricted stock,
net............................. (3,784) -- (1,009)
Merger adjustments................ (499) -- 12,825
Deferred compensation............. 3,115 -- 3,115
Exercise of stock options......... -- -- 40
Stock repurchases................. -- -- (823)
Net loss.......................... -- (79,715) (79,715)
------- -------- --------
BALANCE, FEBRUARY 3, 2001......... $(1,168) $(59,425) $ 20,156
======= ======== ========
See notes to consolidated financial statements.
F-6
dELiA*s CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 31, 1999, JANUARY 29, 2000 AND FEBRUARY 3, 2001
(IN THOUSANDS)
FISCAL
------------------------------
1998 1999 2000
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 5,842 $ 10,958 $(79,715)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 2,677 6,403 11,494
Merger and restructuring charges........................ -- 24,168 32,523
Valuation allowance for deferred tax assets............. -- -- 19,768
Gain on subsidiary IPO and sale of subsidiary stock..... -- (78,117) --
Other non-cash corporate charges........................ -- -- 1,651
Non-cash compensation expense related to restricted
stock................................................. 50 -- 4,561
Minority interest....................................... -- (4,865) (20,812)
Deferred taxes.......................................... 985 11,953 (7,495)
Amortization of investments............................. 160 (473) (524)
Changes in operating assets and liabilities:
Merchandise inventories............................... (6,888) (7,590) 2,413
Prepaid expenses and other current assets............. (7,176) (3,888) 4,720
Other assets.......................................... (1,007) (71) 331
Current liabilities................................... (4,023) 5,111 (5,984)
Long-term liabilities................................. 142 (49) 110
-------- -------- --------
Net cash used in operating activities....................... (9,238) (36,460) (36,959)
INVESTING ACTIVITIES:
Capital expenditures...................................... (6,158) (21,009) (10,805)
Purchase of investment securities:
Held-to-maturity........................................ -- (73,952) (24,282)
Available-for-sale...................................... (46,513) -- --
Other investments......................................... -- (1,000) --
Proceeds from maturity or sale of investment securities:
Held-to-maturity........................................ 30,024 31,508 56,699
Available-for-sale...................................... 53,404 -- --
Acquisitions, net of cash acquired (Note 2)............... (15,203) (547) 174
-------- -------- --------
Net cash provided by (used in) investing activities......... 15,554 (65,000) 21,786
FINANCING ACTIVITIES:
Net proceeds from issuance of subsidiary common stock..... -- 97,496 --
Disposition of subsidiary stock........................... -- 14,090 --
Proceeds from sale of business............................ -- -- 2,289
Exercise of stock options (Note 11)....................... 321 1,201 75
Acquisition of treasury stock............................. -- -- (823)
Borrowings (repayments) under line of credit agreement.... -- 3,000 (639)
Principal payments on long-term debt and capital lease
obligations............................................. (141) (323) (594)
-------- -------- --------
Net cash provided by financing activities................... 180 115,464 308
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 6,496 14,004 (14,864)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 4,485 10,981 24,985
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 10,981 $ 24,985 $ 10,121
======== ======== ========
See notes to consolidated financial statements.
F-7
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 3, 2001
1. BUSINESS AND BASIS OF PRESENTATION
Through our catalogs, retail stores and Web sites, we market apparel,
accessories and home furnishings, as well as other goods and services, primarily
to teen girls and young women.
On April 14, 1999, dELiA*s Inc. completed the initial public offering at $22
per share of 4.2 million shares or 28% of the common stock of iTurf Inc., its
Internet-focused subsidiary. iTurf used $17.7 million of the total
$97.4 million in net offering proceeds to purchase from dELiA*s Inc. 945,044
shares (551,046 pre-merger shares) of dELiA*s Inc. common stock, which was
treated as treasury stock in dELiA*s Inc.'s consolidations. In connection with
the offering, dELiA*s Inc. recognized a pre-tax gain of approximately
$70.0 million. During the fourth quarter of fiscal 1999, dELiA*s Inc. sold an
additional 1.1 million shares of iTurf stock for cash and recorded a related
gain of $8.0 million. As a result of such sales of iTurf shares and iTurf's
issuance of additional shares for acquisitions, dELiA*s Inc.'s ownership of
iTurf had declined to 54% as of November 20, 2000.
On November 20, 2000, iTurf Inc. and dELiA*s Inc. were recombined through
the merger of dELiA*s Inc. into a wholly-owned subsidiary of iTurf Inc. We
issued 1.715 shares of iTurf Class A common stock to dELiA*s Inc. stockholders
for each outstanding share of dELiA*s Inc. common stock surrendered in the
merger. All outstanding dELiA*s Inc. options and restricted stock were converted
at the same exchange ratio. We renamed the parent company of the recombined
business dELiA*s Corp. Because the former stockholders of dELiA*s Inc. owned
more than 50% of dELiA*s Corp. after the merger, the transaction was accounted
for as a "reverse acquisition" by dELiA*s Inc. of the minority interest in
iTurf. In connection with the merger, deferred tax liabilities relating to
earlier issuances of iTurf common stock were eliminated and the remaining net
deferred tax asset was reserved with a current period tax charge (see Note 13)
of $19.8 million. The excess of the net assets acquired over the merger
consideration, after the writeoff of the minority interest proportionate
percentage of iTurf's noncurrent assets and an adjustment relating to our fiscal
2000 restructuring initiatives (see Note 4), was recorded as $20.7 million of
"excess of fair value over purchase price" that will be amortized over five
years.
As a result of the "reverse acquisition" treatment, dELiA*s Corp. reports
the historical results of dELiA*s Inc. for periods prior to the merger with all
share and per share information, except for amounts on our Consolidated Balance
Sheets and Consolidated Statements of Stockholders' Equity, retroactively
adjusted to reflect the merger exchange ratio by multiplying the number of
dELiA*s Inc. shares by 1.715. In presenting our shares outstanding and
calculating loss per share for periods after the merger, we have assumed
conversion on the merger date of all eligible shares of dELiA*s Inc. common
stock. References herein to "we," "our" and similar phrases and to "dELiA*s"
refer to dELiA*s Inc. prior to November 20, 2000 and to dELiA*s Corp. on or
after that date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR--In May 1999, we announced a change in our fiscal year to the 52
or 53 weeks ended on the Saturday closest to January 31 following the
corresponding calendar year. References in this report to "fiscal 2000" mean the
period from January 30, 2000 to February 3, 2001. References to "fiscal 1999"
mean the period from February 1, 1999 to January 29, 2000. Any reference in this
report to a particular fiscal year before 1999 is to the year ended January 31
following the corresponding calendar year. For example, "fiscal 1998" means the
period from February 1, 1998 to January 31, 1999.
F-8
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION--Our consolidated financial statements include
the accounts of dELiA*s and subsidiaries, all of which, except iTurf, were
wholly-owned for all periods presented. For the period that iTurf was not
wholly-owned, the accounts of iTurf were included in the consolidated financial
statements with the outside ownership of iTurf reflected as minority interest.
All significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the amounts reported in our financial statements and
footnotes thereto. Actual results could differ from those estimates.
RECLASSIFICATIONS--Certain amounts have been reclassified to conform to the
current period presentation.
STATEMENTS OF CASH FLOWS--We consider all highly liquid investments with
maturities of 90 days or less when purchased to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value. During fiscal
1998, 1999 and 2000, we paid cash of $3.3 million, $80,000 and $4,000,
respectively, for income taxes and $13,000, $615,000 and $1.3 million,
respectively, for interest. Non-cash investing and financing activities include
the issuances of common stock for the merger described in Note 1 and the
acquisitions described in Note 3 and the issuances of restricted stock described
in Note 11.
INVESTMENTS--Except for an investment in the stock of a privately held
Internet company (see Note 7), our investments consist of debt and equity
securities, principally instruments of the U.S. Government and its agencies, of
municipalities and of short-term mutual municipal and corporate bond funds.
Securities that we expected to sell as part of our asset management strategy, in
response to or in anticipation of changes in interest rates, or for other
similar factors, were classified as available-for-sale and carried at fair
value. Securities that we have the ability and positive intent to hold to
maturity are classified as held-to-maturity and carried at amortized cost.
Realized gains and losses on sales of these securities are reported in earnings
and computed using the specific identification cost basis.
MERCHANDISE INVENTORIES--Merchandise inventories, which are primarily
finished goods, are stated at the lower of cost (determined on a first-in,
first-out basis) or market value.
CATALOG COSTS--Catalog costs, which primarily consist of catalog production
and mailing costs, are capitalized and amortized over the expected life of the
related future revenue stream, which generally covers three to five months from
mailing date. We account for catalog costs in accordance with AICPA Statement of
Position ("SOP") 93-7, "Reporting on Advertising Costs." SOP 93-7 requires that
expenses relating to capitalized advertising costs should be computed using the
ratio of current period revenues for the catalog cost pool to the total of
current and estimated future period revenues for that catalog cost pool.
Deferred catalog costs, which are included in prepaid expenses and other current
assets, were $5.9 million and $3.1 million as of January 29, 2000 and
February 3, 2001, respectively.
ADVERTISING COSTS--Advertising expenses that are not direct-response catalog
costs are expensed as incurred. For fiscal 1999 and 2000, such expenses amounted
to $10.6 million and $14.6 million, respectively, and related primarily to our
Internet businesses.
F-9
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER ASSETS--Goodwill and costs related to trademarks and
licenses are amortized on a straight-line basis over their expected useful
lives, which range from five to 30 years. Significant changes to intangible
assets are described in Notes 1, 3 and 4. Accumulated amortization as of
January 29, 2000 was approximately $2.3 million. As a result of our fiscal 2000
restructuring initiatives (see Note 4), our intangible assets were not
significant as of February 3, 2001.
LONG-LIVED ASSETS--In accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of," we periodically review long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows (on an
undiscounted basis) expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized would be measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.
REVENUE RECOGNITION--Revenue is recognized when merchandise is shipped to
customers or at the point of retail sale. We accrue a sales return allowance in
accordance with our return policy for estimated returns of merchandise
subsequent to the balance sheet date that relate to sales prior to that date. As
of January 29, 2000 and February 3, 2001, the sales return allowance, which is
included in customer liabilities, was $604,000 and $859,000, respectively.
SHIPPING EXPENSES--Expenses incurred in shipping goods to customers is
included in cost of sales.
RECOGNITION OF GAIN ON ISSUANCE OF SUBSIDIARY STOCK--In accordance with the
SEC Staff Accounting Bulletin "Accounting for Sales of Stock by a Subsidiary,"
dELiA*s recorded a gain on the April 1999 issuance of subsidiary stock for the
excess of the offering price per share over the carrying amount because the sale
of such shares by a subsidiary was not a part of a broader corporate
reorganization contemplated or planned. During the fourth quarter of fiscal
1999, we contemplated reorganization plans with respect to that subsidiary that
precluded us from recognizing similar gains in connection with subsequent
issuances of that subsidiary's stock.
INCOME TAXES--Deferred income tax assets and liabilities are recorded in
accordance with SFAS No. 109. Valuation allowances are provided when the
expected realization of tax assets does not meet a "more likely than not"
criteria. (See Note 13.)
COMPUTATION OF HISTORICAL NET INCOME (LOSS) PER SHARE--We calculate net
income (loss) per share in accordance with SFAS No. 128, "Computation of
Earnings Per Share" and SEC Staff Accounting Bulletin No. 98. (See Note 6.)
STOCK-BASED COMPENSATION--In accordance with Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees," compensation cost
for stock-based awards is measured as the excess, if any, of the quoted market
price of our stock as of the time of grant over the amount, if any, that an
employee must pay to acquire the stock. Stock options are generally granted with
exercise prices equal to the fair value of the shares as of the date of grant;
accordingly, we do not generally recognize compensation expense in connection
with stock options. (See Note 11.)
F-10
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
3. ACQUISITIONS
THESPARK.COM, INC.
On February 15, 2000, we acquired TheSpark.com, Inc. The aggregate
consideration paid consisted of newly issued shares of a subsidiary's Class A
common stock and the right to receive additional consideration of up to
$13.5 million in cash and/or stock in fiscal years 2001 and 2002 based on the
achievement of certain performance goals. The transaction was accounted for
under the purchase method of accounting with the operating results of the
acquired business included in our consolidated financial statements from the
date of acquisition and the excess of the aggregate purchase price over the fair
market value of net assets acquired of $14.1 million allocated to goodwill. The
goodwill was assigned a five-year life for amortization. In connection with this
issuance of a subsidiary's common stock, we recorded $2.8 million as additional
paid-in capital.
On January 12, 2001, we entered into an agreement with representatives of
the former stockholders of TheSpark.com, Inc. to amend our contingent
obligations under the acquisition agreement. In exchange for a release from the
original contingent obligations, we paid the former stockholders of
TheSpark.com, Inc. $2.5 million in February 2001 and are obligated to issue to
them on June 1, 2001 up to 2.0 million shares, subject to partial reduction for
appreciation in the market value, of our Class A common stock. We also paid them
$1.7 million in connection with our March 2001 sale of the TheSpark.com
businesses. Finally, we agreed to pay them additional consideration of up to
$1.5 million in cash or stock (at our option) in the first quarter of fiscal
2002.
T@PONLINE.COM, INC.
On September 1, 1999, we acquired T@ponline.com, Inc., an operator of a Web
site directed at college and university students that we renamed Ontap.com, for
newly issued shares of a subsidiary's Class A common stock. We accounted for the
transaction under the purchase method of accounting with the operating results
of the acquired business included in our consolidated financial statements from
the date of acquisition and the excess of the aggregate purchase price over the
fair market value of net assets acquired of $19.0 million allocated to goodwill.
The goodwill was assigned a five-year life for amortization. In connection with
this issuance of a subsidiary's common stock, we recorded $6.9 million as
additional paid-in capital. During fiscal 2000, we shut down the acquired
Internet site. (See Note 4.)
ASSETS OF FULCRUM DIRECT, INC.
In September 1998, we acquired certain assets from the estate of Fulcrum
Direct, Inc. for approximately $4.75 million in cash. The primary assets
included trademarks and customer lists for several catalogs. We also purchased
selected inventory and assumed certain liabilities relating to Storybook
Heirlooms, the catalog that we relaunched after the acquisition. We accounted
for the transaction under the purchase method of accounting, with the operating
results of the acquired business included in our consolidated financial
statements from the date of acquisition and the excess of the aggregate purchase
price over the fair market value of net assets acquired allocated to goodwill.
During fiscal 2000, we approved a plan to sell the Storybook Heirlooms business
(see Note 4) and completed the sale in April 2001.
F-11
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
3. ACQUISITIONS (CONTINUED)
SCREEEM! AND JEAN COUNTRY
In July 1998, dELiA*s acquired assets located in 26 retail stores operated
under the Screeem! and Jean Country names, as well as the leases for such stores
and several related trademarks. The purchase price for the acquisition consisted
of $10.0 million in cash and approximately 1.6 million shares (950,000
pre-merger shares) of dELiA*s Inc. common stock.
The total shares issued for the acquisition includes the original issuance
of approximately 1.4 million shares (800,000 pre-merger shares) in fiscal 1998
plus additional shares issued in February 2000 net of shares cancelled in fiscal
1999 for a working capital purchase price adjustment. The $1.4 million value of
the shares issued in February 2000 was recorded as an increase to goodwill and
stockholders' equity in fiscal 1999 as the contingencies relating to such
issuance had been satisfied by January 29, 2000.
The transaction was accounted for under the purchase method of accounting
with the operating results of the acquired business included in our consolidated
financial statements from the date of acquisition. The excess of the aggregate
purchase price over the fair market value of net assets acquired of
$20.2 million was allocated to goodwill and was being amortized over 30 years.
During fiscal 1999, we recorded a restructuring charge in connection with our
plan to exit the Screeem! and Jean Country retail operations, which included the
write-off of the related unamortized goodwill. (See Note 4.)
On a pro forma basis, assuming the acquisition had occurred on the first day
of fiscal 1998, our net sales, net income and diluted earnings per share would
have been approximately $172.9 million, $4.7 million and $0.18, respectively,
for fiscal 1998. These results are presented for informational purposes only and
do not necessarily represent results which would have occurred.
4. MERGER, RESTRUCTURING AND OTHER NON-CASH CHARGES
FISCAL 2000
During fiscal 2000, dELiA*s Inc. and iTurf Inc. merged and we announced our
intention to focus on our core dELiA*s brand and to sell or shut down our
non-core businesses. The merger and restructuring of our businesses included the
following initiatives:
- the recombination of dELiA*s Inc. and iTurf Inc., as described in Note 1,
in order to allow us, among other things, to manage the catalog and
e-commerce components of our dELiA*s Direct business segment better;
- the liquidation of our Droog direct business, which we substantially
completed in fiscal 2000;
- the sale on February 1, 2001 of substantially all of the assets of our TSI
Soccer direct business;
- the sale on April 26, 2001 of the primary assets of our Storybook
Heirlooms direct business;
- the liquidation of the retail operations of TSI Soccer, which we expect to
complete in the first half of fiscal 2001; and
- the decision to exit our Internet community businesses, shutting down our
OnTap business and iTurf.com Web site in fiscal 2000 and marketing our
gURL and TheSpark.com businesses for
F-12
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
4. MERGER, RESTRUCTURING AND OTHER NON-CASH CHARGES (CONTINUED)
sale; we completed the sale of the TheSpark.com businesses on March 19,
2001; we expect to complete the disposition of gURL in the second quarter
of fiscal 2001.
In connection with these restructuring initiatives, we have recorded the
following:
- $37.6 million for non-cash asset writedowns, offset by a $14.3 million
reduction of the excess of fair value over purchase price attributable to
the operations being shut down or sold;
- $19.8 million for a non-cash current period tax charge taken in connection
with the merger;
- $3.3 million relating to the liquidation of inventory of businesses being
shut down (reflected in cost of sales);
- $3.2 million relating to future lease costs and other contractual
obligations;
- $1.8 million in merger transaction costs;
- $1.2 million in severance costs related to the elimination of
approximately 200 full-time and part-time positions at the locations being
sold or shut down and at our corporate offices; and
- a $500,000 loss on the sale of the TSI Soccer direct business.
The total charge of $53.1 million is recorded as $30.0 million of merger and
restructuring charges, a $19.8 million income tax charge and $3.3 million in
cost of sales. During the first half of fiscal 2001, we expect to record
additional restructuring charges for severance costs relating to the
discontinued Internet community properties and the wind down and sale of the
Storybook Heirlooms business.
As of February 3, 2001, we had eliminated approximately 150 jobs and our
balance sheet includes accruals for $3.1 million for future lease and other
obligations and $800,000 for severance costs. We expect the accrued amounts to
be paid and the remaining approximately 50 employee terminations to occur in the
first half of fiscal 2001.
In addition to the merger and restructuring charges, we recorded the
following other significant non-cash charges during fiscal 2000:
- $11.5 million for depreciation and amortization;
- $4.6 million for compensation expense relating to the issuance of
restricted stock (see Note 11); and
- $1.7 million for the writeoff of fixed assets and other non-cash corporate
charges.
FISCAL 1999
SCREEEM! AND JEAN COUNTRY
During fiscal 1999, we recorded a charge of approximately $24.2 million in
connection with our restructuring plan to exit our Screeem! and Jean Country
retail operations. The charge was comprised of the following:
- $19.4 million for the write-off of the remaining unamortized balance of
goodwill and other intangibles relating to our acquisition of the Screeem!
and Jean Country retail operations;
F-13
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
4. MERGER, RESTRUCTURING AND OTHER NON-CASH CHARGES (CONTINUED)
- $3.6 million for the shutdown of certain retail stores, of which
$2.3 million represented the write-off of assets that would no longer be
used and $1.3 million primarily related to future lease costs;
- $700,000 in severance costs relating to the elimination of approximately
125 full-time and part-time jobs at the Screeem! corporate office and the
store locations to be closed; and
- $500,000 for the liquidation of inventory carried at stores to be
converted or closed (reflected in cost of sales).
The total charge of $24.2 million is recorded as a $23.7 million
restructuring charge in fiscal 1999 operating expenses ($22.9 million recorded
in the first quarter and $800,000 in the fourth quarter of the year) and
$500,000 included in cost of sales of the first quarter. The total charge
includes $1.4 million of goodwill write-off relating to the value of 288,187
shares (168,039 pre-merger shares) of common stock issued in February 2000. This
additional goodwill charge was recorded in fiscal 1999, when the related
contingencies were satisfied, as an increase to additional paid-in capital.
All stores were closed or converted to dELiA*s stores by the end of the
third quarter of fiscal 2000 and all employees have been terminated. As a
result, during fiscal 2000, we reversed $800,000 of restructuring reserve due to
lower lease exit penalties than originally estimated. As of February 3, 2001,
$200,000 remains accrued for employee severance costs to be paid out in the
first half of fiscal 2001.
Aside from the restructuring charges, the significant non-cash charges
recorded during fiscal 1999 were depreciation and amortization, which totaled
$6.4 million.
FISCAL 1998
During fiscal 1998, the significant non-cash charges recorded were
depreciation and amortization, which totaled $2.7 million.
5. SEGMENTS
Our reportable segments have changed as a result of our recent merger and
restructuring initiatives. We currently have two reportable segments: dELiA*s
Direct and dELiA*s Retail. All of our other businesses, which are in the process
of being sold or shut down and therefore no longer qualify as operating segments
under SFAS No. 131, are included as "Non-core" below. Our two segments offer
similar products to similar customers, but are managed separately because of
their distribution methods. Both segments earn revenues primarily from the sale
of apparel, accessories and home furnishings to consumers. The Direct segment
takes phone, online and mail orders from our customers and ships merchandise
directly to those customers. Our dELiA*s retail stores display merchandise
primarily in mall stores and sell directly to customers who visit those
locations. Inter-segment activity is minimal, is recorded at cost and is
eliminated in consolidation and in preparation of the disclosure below. Sales
outside of the United States are insignificant.
We evaluate performance and allocate resources primarily based on operating
income (loss) before certain expense allocations for shared resources;
depreciation, amortization and non-cash compensation; unusual items; minority
interest; interest and other income; and income taxes. There are
F-14
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
5. SEGMENTS (CONTINUED)
no material differences between accounting policies used by the reportable
segments in preparation of this information and those described in the summary
of significant accounting policies in this report.
All segment disclosures have been restated to reflect the reporting segments
as defined for fiscal 2000.
FISCAL 1998 FISCAL 1999 FISCAL 2000
------------ ------------ ------------
NET REVENUES
dELiA*s Direct..................................... $ 98,102,000 $ 85,256,000 $ 96,251,000
dELiA*s Retail..................................... 5,973,000 16,934,000 45,097,000
------------ ------------ ------------
Core dELiA*s....................................... 104,075,000 102,190,000 141,348,000
Non-core 54,289,000 88,582,000 73,717,000
------------ ------------ ------------
Total.............................................. $158,364,000 $190,772,000 $215,065,000
============ ============ ============
INCOME (LOSS) BEFORE TAXES
dELiA*s Direct operating income (loss)............. $ 6,228,000 $(15,334,000) $ (936,000)
dELiA*s Retail operating income (loss)............. 1,595,000 (3,020,000) (369,000)
less: unallocated shared expenses.................. (1,307,000) (2,715,000) (5,650,000)
------------ ------------ ------------
Core dELiA*s operating income (loss)............... 6,516,000 (21,069,000) (6,955,000)
Non-core operating income (loss)................... 4,496,000 (13,743,000) (32,256,000)
Depreciation, amortization and non-cash
compensation..................................... 2,727,000 6,403,000 16,055,000
Merger, restructuring and other one-time non-cash
charges.......................................... -- 24,168,000 33,635,000
Gain on subsidiary IPO and sale of subsidiary
stock............................................ -- (78,117,000) --
Minority interest.................................. -- (4,865,000) (20,812,000)
Interest and other income, net..................... (962,000) (2,429,000) (316,000)
------------ ------------ ------------
Total.............................................. $ 9,247,000 $ 20,028,000 $(67,773,000)
============ ============ ============
ASSETS AT THE END OF FISCAL YEAR
dELiA*s Direct inventory........................... $ 13,898,000 $ 11,112,000
dELiA*s Retail inventory........................... 2,041,000 5,251,000
Non-core inventory and other assets 168,101,000 68,680,000
------------ ------------
Total.............................................. $184,040,000 $ 85,043,000
============ ============
F-15
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
6. NET INCOME (LOSS) PER SHARE
Net income (loss) per share amounts for all periods prior to the
November 2000 merger (see Note 1) have been restated to reflect the merger with
all components of the denominator having been multiplied by the 1.715 exchange
ratio. Net loss per share for fiscal 2000 is calculated assuming that all shares
of dELiA*s Inc. common stock that were eligible for exchange in the merger were
exchanged on the merger date.
The following table sets forth the computation of basic and diluted net
income (loss) per share:
FISCAL 1998 FISCAL 1999 FISCAL 2000
----------- ----------- ------------
Net income (loss)...................................... $5,842,000 $10,958,000 $(79,715,000)
---------- ----------- ------------
Denominator for basic earnings per share............... 23,631,000 24,550,000 26,744,000
Effect of dilutive securities:
Stock options...................................... 844,000 1,626,000 --
Contingent stock--acquisitions..................... 80,000 201,000 --
---------- ----------- ------------
Denominator for diluted earnings per share............. 24,555,000 26,377,000 26,744,000
========== =========== ============
Basic net income (loss) per share...................... $ 0.25 $ 0.45 $ (2.98)
========== =========== ============
Diluted net income (loss) per share.................... $ 0.24 $ 0.42 $ (2.98)
========== =========== ============
For fiscal 1998 and 1999, options to purchase 283,000 shares (165,000
pre-merger shares) and 1.5 million shares (883,000 pre-merger shares),
respectively, were outstanding as of the end of the period but not included in
the computation of diluted net income per share because their effect would have
been antidilutive. For fiscal 2000, all options (see Note 11), as well as the
shares to be issued in fiscal 2001 for the TheSpark.com acquisition (see
Note 3) were excluded from the computation of diluted loss per share.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value amounts reported in our balance sheets for cash and cash
equivalents and long-term debt approximate fair values. Except for a $1 million
fiscal 1999 investment in a start-up Internet company that was accounted for
under the cost method until it was written off in fiscal 2000, our investments
of $43.9 million and $11.0 million as of January 29, 2000 and February 3, 2001,
respectively, represent debt securities that are classified as held-to-maturity
and carried at amortized cost. The fair value of those debt security investments
as of January 29, 2000 and February 3, 2001 is $42.7 million and $11.0 million,
respectively, based on quotes obtained from brokers for those instruments.
F-16
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
8. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line method over the estimated useful lives or, for leasehold
improvements, the shorter of the estimated useful lives or the remaining term of
the lease. Major classes of property and equipment are as follows:
ESTIMATED USEFUL LIVES JANUARY 29, 2000 FEBRUARY 3, 2001
---------------------- ----------------- -----------------
Furniture, fixtures and equipment............ 5 - 10 years $20,233,000 $20,317,000
Leasehold improvements....................... Term of lease 15,564,000 16,529,000
Building..................................... 40 years 5,448,000 5,448,000
Land......................................... n/a 873,000 873,000
----------- -----------
Total--at cost............................... 42,118,000 43,167,000
Less accumulated depreciation................ 6,635,000 13,022,000
----------- -----------
Total property and equipment, net............ $35,483,000 $30,145,000
=========== ===========
9. LONG-TERM DEBT AND CREDIT FACILITIES
In August 1999, in connection with the purchase of our distribution facility
in Hanover, Pennsylvania, we borrowed $5.3 million from Allfirst Bank in the
form of a seven-year mortgage loan on the property. We are subject to certain
covenants under the loan agreement, including a covenant to maintain a fixed
charge coverage ratio. In August 1999, we also entered into an interest-rate
swap agreement with Allfirst Bank, under which we effectively converted the
LIBOR-based variable interest rate mortgage to a fixed rate loan with an
interest rate of approximately 8.78%. On April 26, 2000, we received a waiver
through the first quarter of fiscal 2001 of the fixed charge coverage ratio
covenant. On May 4, 2001, we received a waiver of the fixed charge coverage
ratio covenant through August 6, 2003 in exchange for our agreement to make a
principal payment of $2.0 million in May 2001 and to pay on August 6, 2003 the
outstanding principal balance as of that date. On May 4, 2001, we also
terminated the related interest-rate swap agreement.
The principal balance on the mortgage was $5.3 million and $5.2 million as
of January 29, 2000 and February 3, 2001, respectively. Future mortgage
principal payments, which reflect our May 2001 agreement with Allfirst, are as
follows: fiscal 2001--$2.1 million; 2002--$100,000; and 2003--$3.0 million.
On April 28, 2000, we entered into a three-year agreement with Congress
Financial Corporation that amended and restated the terms of our previous credit
agreement with First Union, the parent company of Congress. The Congress
facility, as subsequently amended in connection with our merger and
restructurings, consists of a revolving line of credit permitting us to borrow
up to $25 million, limited to specified percentages of the value of our eligible
inventory as determined under the credit agreement, and provides for the
issuance of documentary and standby letters of credit up to $10 million. Our
obligations under the agreement are secured by a lien on substantially all of
our assets, except certain real property and other specified assets. The
agreement contains certain covenants, with which we are in compliance, and
default provisions customary for credit facilities of this nature, including
limitations on our payment of dividends. The agreement also contains controls on
our cash management and certain limits on our ability to distribute assets. At
our option, borrowings under this facility bear interest at First Union National
Bank's prime rate plus 25 basis points or at LIBOR
F-17
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
9. LONG-TERM DEBT AND CREDIT FACILITIES (CONTINUED)
plus 225 basis points. A fee of 0.375% per year is assessed monthly on the
unused portion of the line of credit as defined. As of February 3, 2001, the
remaining balance, which was classified as current, was $2.4 million,
outstanding letters of credit were $1.4 million and unused available credit was
$5.5 million. During fiscal 2000, the weighted average interest rate incurred on
our credit agreement was 9.5%.
During fiscal 1999 and fiscal 2000, interest expense was $700,000 and
$1.3 million, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEASES
As of February 3, 2001, dELiA*s was obligated under various long-term
non-cancelable leases for offices, retail stores, warehouse and distribution
space and equipment requiring minimum annual rental payments. Those future
obligations, including amounts for which we've reserved in connection with our
restructuring initiatives (see Note 4) are payable as follows:
FISCAL CAPITAL LEASES OPERATING LEASES
- ------ -------------- ----------------
2001............................................ $ 614,000 $ 7,572,000
2002............................................ 544,000 7,002,000
2003............................................ 521,000 6,973,000
2004............................................ 130,000 6,534,000
2005............................................ -- 6,257,000
2006 and thereafter............................. -- 22,431,000
---------- -----------
Minimum lease payments.......................... $1,809,000 $56,769,000
---------- -----------
The total minimum payments for capital leases include approximately $100,000
for imputed interest, which reduces the total future payments to $1.7 million
present value. Amortization of assets recorded under capital leases is included
with depreciation expense on our owned assets. (See Note 8.)
Our retail store leases typically include contingent rent clauses that will
result in higher payments if the store sales exceed expected levels. Some of our
operating leases also include renewal options and escalation clauses with terms
that are typical for the industry. In addition, we are obligated to pay a
proportionate share of increases in real estate taxes and other occupancy costs
for space covered by our operating leases. Rent expense for fiscal 1998, 1999
and 2000 consisted almost entirely of minimum rentals and was $4.9 million,
$10.3 million and $7.8 million, respectively.
BENEFIT PLAN
We have a 401(k) retirement plan covering all eligible employees. Under the
plan, employees can defer 1% to 15% of compensation up to federal limits. We may
make matching contributions on a discretionary basis. The employee's
contribution is 100% vested and the employer's matching contribution vests over
a five-year period. Our employer's contributions to the plan were $24,000,
$46,000 and $82,000 in fiscal 1998, 1999 and 2000, respectively.
F-18
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
INTERNET ALLIANCES
In May 1999, we entered into a strategic marketing alliance with America
Online, Inc. Over the original two-year term of the agreement, we agreed to pay
America Online a total of approximately $8.1 million. The term for fulfillment
of the obligations under the agreement was subsequently extended for two years
from March 30, 2001. At February 3, 2001, we had a remaining payment obligation
of $1.1 million to be paid out over the remainder of the term.
In connection with the September 1999 T@ponline transaction, we entered into
a marketing alliance with MarketSource Corporation, which is owned by certain of
the sellers of T@ponline, to promote our network of sites through MarketSource's
offline marketing channels. In December 2000, we amended the alliance to
eliminate our outstanding commitments to them. Since that amendment,
MarketSource is our agent for the sale of advertising on our Web sites.
During fiscal 2000, we entered an agreement with DoubleClick Inc. under
which we are committed to minimum payments of $215,000, $160,000 and $80,000
during fiscal 2001, 2002 and 2003, respectively.
LITIGATION
In 1999, two separate purported securities class action lawsuits were filed
against dELiA*s Inc. and certain of its officers and directors, and one former
officer of a subsidiary. The original complaints were filed in Federal District
Court for the Southern District of New York by Allain Roy on June 1, 1999 and by
Lorraine Padgett on June 3, 1999. The suits were consolidated into a single
class action and an amended and consolidated complaint was filed on March 22,
2000. The complaint in this lawsuit purports to be a class action on behalf of
the purchasers of our securities during the period January 20, 1998 through
September 10, 1998. The complaint generally alleges that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
by making material misstatements and by failing to disclose certain allegedly
material information regarding trends in our business. The complaint also
alleges that the individual defendants are liable for those violations under
Section 20(a) of the Securities Exchange Act. The complaint seeks unspecified
damages, attorneys' and experts' fees and costs, and such other relief as the
court deems proper. On April 14, 2000, dELiA*s Inc. and the other named
defendants filed a motion to dismiss the lawsuit. The motion to dismiss was
denied on March 26, 2001. We intend to vigorously defend against this action.
While an estimate of the possible range of loss can not be made, based upon
information presently known to management, we do not believe that the ultimate
resolution of this lawsuit will have a material adverse effect on our business.
Between August 17 and August 25, 2000, three purported class action
complaints on behalf of a subsidiary's stockholders were filed in Delaware
Chancery Court against the subsidiary, dELiA*s Inc. and each of the subsidiary's
directors. These actions include: Pack v. Kahn, et al., Del. Ch., C.A.
No. 18242NC, Semeraro v. Kahn, et al., Del. Ch., C.A. No. 18258, and Engel v.
Kahn, et al., Del. Ch., C.A. No. 18260NC. All three complaints made virtually
identical claims, alleging that dELiA*s Inc. and the members of the subsidiary's
board of directors breached their fiduciary duties to the subsidiary's public
stockholders and that the merger exchange ratio was unfair to the subsidiary's
public stockholders. The actions were consolidated and an amended complaint was
filed on January 19, 2001.
F-19
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
This complaint seeks class certification and other equitable and monetary
relief, including enjoining the merger or awarding damages. On April 3, 2001, we
filed a motion to dismiss the lawsuit. Although we believe that the allegations
of the complaint are without substantial merit and intend to vigorously contest
this action, we can not predict at this time the outcome of any litigation or
the possible range of loss or whether the resolution of the litigation could
have a material adverse effect on our business.
In the first quarter of fiscal 2001, we were served with a purported class
action complaint alleging that we improperly collected sales tax from residents
of New York State. While an estimate of the possible range of loss can not be
made, based upon information presently known to management, we do not believe
that the ultimate resolution of this lawsuit will have a material adverse effect
on our business.
11. STOCK-BASED COMPENSATION
Prior to the dELiA*s Inc. initial public offering, the board of directors of
dELiA*s Inc. approved and adopted the 1996 Stock Incentive Plan. Such plan was
amended and restated in July 1998. On December 1, 1998, the board of directors
of dELiA*s Inc. approved and adopted the 1998 Stock Incentive Plan. Prior to the
iTurf Inc. initial public offering, the board of directors of iTurf Inc.
approved and adopted the 1999 Amended and Restated iTurf Stock Incentive Plan.
The 1996 Stock Incentive Plan, as amended, the 1998 Stock Incentive Plan and the
1999 Stock Incentive Plan (collectively, the "Incentive Plans") provide for the
following types of awards to eligible employees: (i) stock options, including
incentive stock options and non-qualified stock options; (ii) stock appreciation
rights, in tandem with stock options or freestanding; and (iii) restricted
stock. The maximum number of shares of common stock subject to each of the stock
options or stock appreciation rights that may be granted to any individual under
the 1999 Stock Incentive Plan is 750,000 for each fiscal year. If a stock
appreciation right is granted in tandem with a stock option, it shall apply
against the individual limits for both stock options and stock appreciation
rights, but only once against the maximum number of shares available under the
Incentive Plans.
On November 17, 2000, the stockholders of iTurf voted to amend iTurf's 1999
Amended and Restated Stock Incentive Plan to provide that the number of shares
available for issuance under that plan will automatically increase on the first
day of each of calendar years 2001 and 2002 by an amount equal to four percent
of the total number of shares of iTurf's Class A common stock outstanding on the
last day of the immediately preceding calendar year, or a lesser amount
determined by iTurf's board of directors. No automatic increase may exceed
1.75 million shares.
STOCK OPTIONS
On November 20, 2000, in connection with the merger of dELiA*s Inc. and
iTurf Inc., dELiA*s Corp. assumed all of the options outstanding under the 1996
Stock Incentive Plan and the 1998 Stock Incentive Plan. Such options were
adjusted to reflect the 1.715 merger exchange ratio with the number of shares
underlying each option multiplied by the ratio and the related exercise prices
divided by the ratio. All historical stock option information of dELiA*s Inc.
that is provided herein has been similarly restated. The 1.2 million iTurf Inc.
options outstanding as of the date of merger, which had an average exercise
price of $9.77, continued to be outstanding after the merger with their terms
and conditions unchanged, and are included in the total fiscal 2000 grants in
the table below. From the date of the
F-20
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
11. STOCK-BASED COMPENSATION (CONTINUED)
recombination of dELiA*s Inc. and iTurf Inc., options are only available for
grant under the 1999 Stock Incentive Plan. As of February 3, 2001, options to
purchase 5.3 million shares of our Class A common stock were outstanding under
the Incentive Plans and options to purchase an additional 2.2 million shares
were available for grant under the 1999 Stock Incentive Plan.
On June 22, 1998 and September 15, 1998, in an effort to retain employees at
a time when a significant percentage of employee stock options had exercise
prices that were above fair market value, we reduced the exercise price of
outstanding common stock options held by our employees, consultants and
directors to the fair market value per share as of the date of the reduction in
price. All options maintained the same vesting and expiration terms. Not all
grants to officers were repriced. Executive officers forfeited a portion of
prior grants in connection with the repricing.
An executive is party to a stock option agreement with us pursuant to which
we granted such executive an option to purchase up to an aggregate of 428,750
shares of our Class A common stock at an exercise price of $9.04 per share, the
fair market value on the date of grant. A portion of the grant was repriced on
September 15, 1998 to the fair market value as of that date. The option became
exercisable as to 85,750 shares on each of July 10, 1999 and 2000 and becomes
exercisable as to 85,750 shares on each of July 10, 2001, 2002 and 2003.
A summary of dELiA*s stock option activity for the three most recent fiscal
years is as follows:
FISCAL 1998 FISCAL 1999 FISCAL 2000
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- ---------- --------
Outstanding at beginning of period... 1,276,709 $8.72 5,212,074 $3.95 5,808,076 $4.83
Granted*............................. 4,280,954 9.23 1,452,662 7.94 4,069,695 4.10
Exercised............................ (84,052) 3.83 (354,636) 3.39 (7,277) 2.89
Canceled*............................ (261,537) 10.52 (502,023) 5.68 (4,530,489) 4.44
--------- --------- ----------
Outstanding at end of period......... 5,212,074 $3.95 5,808,076 $4.83 5,340,005 $4.60
========= ===== ========= ===== ========== =====
Exercisable at end of period......... 602,526 $3.35 2,111,045 $3.62 1,897,886 $4.96
========= ===== ========= ===== ========== =====
- ------------------------
* Granted and canceled share amounts reported for fiscal 1998 exclude
repricings.
F-21
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
11. STOCK-BASED COMPENSATION (CONTINUED)
The following summarizes dELiA*s stock option information as of February 3,
2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- ---------------- ----------- ----------------
Less than $3.50.............. 3,309,559 8.7 $ 1.82 1,013,388 $ 2.54
$3.50 to $6.99............... 825,021 8.4 $ 4.65 516,006 $ 4.81
$7.00 to $10.49.............. 599,559 7.8 $ 9.61 253,187 $10.02
$10.50 to $15.00............. 411,779 8.9 $11.76 69,807 $12.48
More than $15.00............. 194,087 8.2 $21.25 45,498 $20.73
--------- --- ------ --------- ------
Total........................ 5,340,005 8.5 $ 4.60 1,897,886 $ 4.96
We apply APB No. 25 and related interpretations in accounting for the
Incentive Plans. Generally, all grants have a fixed exercise price with vesting
based solely on service. Accordingly, no compensation expense has been
recognized for options under these plans. Had compensation expense been
determined based on the fair value of stock option grants on the date of grant
in accordance with SFAS No. 123, our net income (loss) and net income (loss) per
share would have been as follows:
FISCAL 1998 FISCAL 1999 FISCAL 2000
----------- ----------- ------------
Pro forma net income (loss)............................. $1,663,000 $5,484,000 $(82,658,000)
========== ========== ============
Pro forma basic net income (loss) per share............. $ 0.12 $ 0.38 $ (3.09)
========== ========== ============
Pro forma diluted net income (loss) per share........... $ 0.12 $ 0.36 $ (3.09)
========== ========== ============
The average estimated fair market value of options granted during fiscal
1998, 1999 and 2000 was $3.00, $7.34 and $1.01 per share, respectively. In
preparing such estimates, we used the Black-Scholes option pricing model with
the following weighted average assumptions tused: no dividend yield; expected
volatility of 65%, 65% and 82%, respectively, risk-free interest rates of 4.6%,
5.5% and 6.0%, respectively; expected lives of three to five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because our stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in our opinion, the existing
models do not necessarily provide a reliable measure of the fair value of our
stock options.
RESTRICTED STOCK
FISCAL 2000
During fiscal 2000, dELiA*s and iTurf issued restricted common stock
primarily in exchange for outstanding options held by certain employees and
non-employee directors, resulting in the issuance of approximately 2.9 million
shares (1.7 million pre-merger shares) of dELiA*s Inc. restricted common
F-22
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
11. STOCK-BASED COMPENSATION (CONTINUED)
stock, 1.1 million shares of iTurf restricted common stock, and 100,000 shares
of dELiA*s Corp. common stock. Certain vesting schedules of the restricted stock
were extended as compared to the related option vesting schedules. Restricted
stock was issued primarily in an effort to retain these employees at a time the
exercise prices of their options were above current market prices for the common
stock.
The value of the dELiA*s restricted stock granted, based upon the market
value as of the award date, was recorded as deferred compensation, an offset to
stockholders' equity which is being amortized against earnings over the related
vesting periods. Prior to the November 2000 merger, iTurf's restricted stock
grant was recorded as minority interest and was being similarly amortized
against the earnings of that subsidiary. As a result of the merger, all unvested
shares of iTurf restricted stock were revalued based on the current market price
of dELiA*s Inc. stock and such value was added to deferred compensation for
amortization over the remaining vesting periods. During fiscal 2000, we reduced
the deferred compensation balance by a total of $3.5 million as we recognized
non-cash compensation expense relating to restricted stock and made certain
adjustments in connection with our restructuring initiatives. The deferred
compensation balance as of February 3, 2001 was $1.2 million.
In the accompanying Consolidated Statement of Stockholders' Equity,
issuances of restricted stock include the effect of subsidiary grants and are
shown net of forfeitures and restructuring-related adjustments.
FISCAL 1996
During fiscal 1996, certain employees were granted Class B restricted
membership interests that were converted into shares of restricted dELiA*s Inc.
common stock upon the December 1996 initial public offering. The cost of the
restricted membership interests, based upon their fair market value as of the
award date, was credited to stockholders' equity and was amortized over the
vesting period of 30 months. Related compensation expense recognized during
fiscal 1998 was $50,000.
12. STOCK REPURCHASES
On December 13, 2000, we announced that our Board of Directors authorized us
to repurchase up to $2,000,000 worth of shares of our Class A common stock,
subject to market conditions. During the fourth quarter of fiscal 2000, we
purchased approximately 700,000 shares of our Class A common stock at market
value totaling approximately $800,000. Such shares have been classified as
treasury stock at cost.
13. INCOME TAXES
In connection with the November 20, 2000 merger of dELiA*s Inc. and
iTurf Inc., deferred tax liabilities of approximately $26.1 million relating to
issuances of iTurf common stock ($24.1 million relating to fiscal 1999 issuances
and $2.0 million relating to fiscal 2000 issuances), were written off in
purchase accounting. In the absence of these deferred tax liabilities, an
additional valuation allowance was required which resulted in a current period
merger-related tax charge of approximately $19.8 million.
F-23
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
13. INCOME TAXES (CONTINUED)
dELiA*s had a net operating loss carryover ("NOL") of approximately
$69.5 million as of February 3, 2001 representing the loss on dELiA*s current
year operations, iTurf's pre-merger operations and the separate company loss of
approximately $1.4 million relating to our TSI Soccer business. The TSI Soccer
NOL is subject to limitation under the provisions of the Internal Revenue Code.
The federal NOL will expire in 2012 through 2021.
During fiscal 1999, additional paid-in capital was increased $1.8 million
for the tax effect of stock option exercises and decreased $2.4 million for the
tax effect of the issuance of iTurf common stock in connection with the OnTap
acquisition.
The provision for income taxes is comprised of the following:
FISCAL 1998 FISCAL 1999 FISCAL 2000
----------- ----------- -----------
Federal:
Current............................................... $1,700,000 $(2,463,000) $ (224,000)
Deferred.............................................. 918,000 13,185,000 9,401,000
State and local:
Current............................................... 575,000 -- --
Deferred.............................................. 212,000 (1,652,000) 2,765,000
---------- ----------- -----------
Total provision......................................... $3,405,000 $ 9,070,000 $11,942,000
========== =========== ===========
The effective income tax rates differed from the federal statutory income
tax rates as follows:
FISCAL 1998 FISCAL 1999 FISCAL 2000
----------- ----------- ------------
Federal taxes at statutory rates....................... $3,144,000 $ 6,810,000 $(23,721,000)
State and local taxes net of federal benefit........... 519,000 (1,090,000) 1,797,000
Valuation allowance.................................... -- 4,777,000 26,171,000
Goodwill write-off..................................... -- -- 7,648,000
Minority interest...................................... -- (1,646,000) --
Tax-exempt interest income............................. (252,000) -- --
Other.................................................. (6,000) 219,000 47,000
---------- ----------- ------------
$3,405,000 $ 9,070,000 $ 11,942,000
========== =========== ============
F-24
dELiA*s CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 3, 2001
13. INCOME TAXES (CONTINUED)
The significant components of our net deferred tax assets are as follows:
JANUARY 29, 2000 FEBRUARY 3, 2001
----------------- -----------------
DEFERRED TAX ASSETS:
Inventory reserves.......................................... $ 1,043,000 $ 920,000
Net operating loss.......................................... 7,510,000 28,198,000
Uniform capitalization--inventories......................... 594,000 484,000
Reserves and accruals....................................... 385,000 902,000
Sales return allowance...................................... 156,000 418,000
Accrued restructuring....................................... 9,707,000 2,410,000
Property and equipment...................................... 224,000 149,000
Other....................................................... 2,577,000 425,000
Valuation allowance*........................................ (7,795,000) (32,715,000)
------------ ------------
Total deferred tax assets................................... 14,401,000 1,191,000
DEFERRED TAX LIABILITIES:
Catalog costs............................................... (2,015,000) (641,000)
Amortization................................................ -- (550,000)
Issuances of subsidiary stock............................... (24,125,000) --
Other....................................................... (99,000) --
------------ ------------
Total deferred tax liabilities.............................. (26,239,000) (1,191,000)
------------ ------------
NET DEFERRED TAX ASSETS (LIABILITIES)....................... $(11,838,000) $ --
============ ============
- ------------------------
* The company's existing deferred tax assets at January 29, 2000 and
February 3, 2001 have been reduced by a valuation allowance of approximately
$7.8 million and $32.7 million, respectively, due to the uncertainty
regarding the realization of such deferred tax assets.
14. SUBSEQUENT EVENTS
On March 19, 2001, we completed the sale of the TheSpark.com businesses to a
subsidiary of Barnes & Noble, Inc. After completion of the transaction and our
related payment of $1.7 million to the former stockholders of
theSpark.com, Inc., our remaining obligations to them in connection with our
acquisition of the TheSpark.com businesses (see Note 3) were: (1) to issue to
them on June 1, 2001 up to 2.0 million shares, subject to partial reduction for
appreciation in market value, of our Class A common stock; and (2) to pay them
$1.5 million in cash or stock (at our election) not later than March 1, 2002.
The estimated value of these contingent obligations net of the estimated
proceeds on the sale was reserved as part of our restructuring initiatives (see
Note 4).
On April 26, 2001, we sold substantially all of the assets of the Storybook
Heirlooms business.
On May 4, 2001, we received a waiver of the fixed charge coverage ratio
covenant through August 6, 2003 in exchange for our agreement to make a
principal payment of $2.0 million in May 2001 and to pay on August 6, 2003 the
outstanding principal balance as of that date. On May 4, 2001, we also
terminated the related interest-rate swap agreement.
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
our behalf by the undersigned thereunto duly authorized.
/s/ STEPHEN I. KAHN
---------------------------------------------
Stephen I. Kahn
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Date: May 4, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ STEPHEN I. KAHN Chairman of the Board and Chief May 4, 2001
------------------------------------ Executive Officer (principal executive
Stephen I. Kahn officer)
/s/ DENNIS GOLDSTEIN Chief Financial Officer (principal May 4, 2001
------------------------------------ financial and accounting officer)
Dennis Goldstein
/s/ CHRISTOPHER C. EDGAR Vice Chairman and Director May 4, 2001
------------------------------------
Christopher C. Edgar
/s/ CLARE COPELAND Director May 4, 2001
------------------------------------
Clare Copeland
/s/ EVAN GUILLEMIN President and Director May 4, 2001
------------------------------------
Evan Guillemin
/s/ S. ROGER HORCHOW Director May 4, 2001
------------------------------------
S. Roger Horchow
/s/ GERALDINE KARETSKY Director May 4, 2001
------------------------------------
Geraldine Karetsky
/s/ TIMOTHY U. NYE Director May 4, 2001
------------------------------------
Timothy U. Nye
/s/ JOSEPH J. PINTO Director May 4, 2001
------------------------------------
Joseph J. Pinto
/s/ DOUGLAS R. PLATT Director May 4, 2001
------------------------------------
Doug Platt
EXHIBIT INDEX
2.1 Agreement and Plan of Merger dated February 4, 2000, by and
among iTurf, iTurf Caveman Acquisition Corporation,
TheSpark.com, Inc. ("Spark"), and the stockholders of Spark
(incorporated by reference to Exhibit 2.1 to the iTurf Inc.
Current Report on Form 8-K dated February 25, 2000)
2.2 Agreement and Plan of Merger, dated as of August 16, 2000,
among iTurf Inc., iTurf Breakfast Corp. and dELiA*s Inc.
(incorporated by reference to Annex A to the iTurf Inc.
Registration Statement on Form S-4 (Registration No.
333-44916))
3.1 Second Restated Certificate of Incorporation of iTurf Inc.
(incorporated by reference to Annex B to the joint proxy
statement/prospectus included with the iTurf Inc.
Registration Statement on Form S-4 (Registration No.
333-44916))
3.2* Amended and Restated By-laws of dELiA*s Corp.
10.1 Form of Employment Agreement between dELiA*s Inc. and
Stephen I. Kahn (incorporated by reference to Exhibit 10.1
to the dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
10.2 Employment Agreement dated April 5, 1999 between iTurf Inc.
and Stephen I. Kahn (incorporated by reference to
Exhibit 10.10 to the iTurf Inc. registration statement on
Form S-1 (Registration No. 333-71123))
10.3 Amendment No. 2 to Employment Agreement between
dELiA*s Inc. and Stephen I. Kahn, dated June 9, 2000
(incorporated by reference to Exhibit 10.35 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended April 29, 2000)
10.4 Employment Agreement between dELiA*s Inc. and Christopher C.
Edgar (incorporated by reference to Exhibit 10.2 to the
dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
10.5 Employment Agreement between dELiA*s Inc. and Evan Guillemin
(incorporated by reference to Exhibit 10.3 to the
dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
10.6 Form of Family Stockholders Agreement among dELiA*s Inc.,
Stephen I. Kahn and the persons listed on Exhibit A thereto
(incorporated by reference to Exhibit 10.4 to the
dELiA*s Inc. Registration Statement on Form S-1
(Registration No. 333-15153))
10.7 Amended and Restated 1996 Stock Incentive Plan of
dELiA*s Inc. (incorporated by reference to the dELiA*s Inc.
Schedule 14A filed on June 12, 1998)
10.8 iTurf Inc. 1999 Amended and Restated Stock Incentive Plan
(incorporated by reference to Annex E of the joint
proxy/prospectus included with the iTurf Inc. registration
statement on Form S-4 (Registration No. 333-44916))
10.9 Lease Agreement dated May 3, 1995 between dELiA*s Inc. and
The Rector, Church Wardens and Vestrymen of Trinity Church
in the City of New York (the "Lease Agreement");
Modification and Extension of Lease Agreement dated
September 26, 1996 (incorporated by reference to
Exhibit 10.9 to the dELiA*s Inc. Registration Statement on
Form S-1 (Registration No. 333-15153))
10.10 Agreement dated April 4, 1997 between dELiA*s Inc. and The
Rector, Church Wardens and Vestrymen of Trinity Church in
the City of New York amending the Lease Agreement
(incorporated by reference to Exhibit 10.13 to the dELiA*s
Inc. Annual Report on Form 10-K for the fiscal year ended
January 31, 1997)
10.11 Agreement dated October 7, 1997 between dELiA*s Inc. and The
Rector, Church Wardens and Vestrymen of Trinity Church in
the City of New York amending the Lease Agreement
(incorporated by reference to Exhibit 10.14 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1997)
10.12 Amendment No. 1 to Employment Agreement between
dELiA*s Inc. and Christopher C. Edgar, dated September 15,
1998 (incorporated by reference to Exhibit to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1998)
10.13 Amendment No. 1 to Employment Agreement between
dELiA*s Inc. and Evan Guillemin, dated September 15, 1998
(incorporated by reference to Exhibit 10.16 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1998)
10.14 1998 Stock Incentive Plan of dELiA*s Inc. (incorporated by
reference to Exhibit 10.17 to the dELiA*s Inc. Quarterly
Report on Form 10-Q for the fiscal quarter ended
October 31, 1998)
10.15 Intercompany Services Agreement between dELiA*s Inc. and
iTurf Inc., dated April 8, 1999 (incorporated by reference
to Exhibit 10.1 to the iTurf Inc. registration statement on
Form S-1 (Registration No. 333-71123))
10.16 Trademark License Agreement between dELiA*s Inc. and
iTurf Inc., dated April 8, 1999 (incorporated by reference
to Exhibit 10.2 to the iTurf Inc. registration statement on
Form S-1 (Registration No. 333-71123))
10.17 Advertising Agreement between iTurf Inc. and America
Online, Inc., dated May 4, 1999 (incorporated by reference
to Exhibit 10.16 to the iTurf Inc. Quarterly Report on
Form 10-Q for the fiscal quarter ended May 1, 1999) +
10.18 Construction Loan Agreement dated August 6, 1999, among
dELiA*s Distribution Company, dELiA*s Inc. and Allfirst Bank
(incorporated by reference to Exhibit 10.23 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended July 31, 1999)
10.19 Mortgage Note dated August 6, 1999 made by dELiA*s
Distribution Company in favor of Allfirst Bank (incorporated
by reference to Exhibit 10.24 to the dELiA*s Inc. Quarterly
Report on Form 10-Q for the fiscal quarter ended July 31,
1999)
10.20 Registration Rights Agreement between iTurf Inc. and
MarketSource Corporation (incorporated by reference to
Exhibit 10.19 to the iTurf Inc. Registration Statement on
Form S-1 (Registration No. 333-90435))
10.21 Amendment No. 2 to Employment Agreement between
dELiA*s Inc. and Christopher C. Edgar, dated October 18,
1999 (incorporated by reference to Exhibit to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1999)
10.22 Amendment No. 2 to Employment Agreement between
dELiA*s Inc. and Evan Guillemin, dated October 18, 1999
(incorporated by reference to Exhibit 10.29 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1999)
10.23 Lease Agreement dated January 30, 2000 by and between
iTurf Inc. and the State-Whitehall Company (incorporated by
reference to Exhibit 10.20 to the iTurf Inc. Annual Report
on Form 10-K for the fiscal year ended January 29, 2000)
10.24 Amended and Restated Credit Agreement among dELiA*s Inc. and
its subsidiaries set forth on Schedule 1 thereto and
Congress Financial Corporation dated April 28, 2000
(incorporated by reference to the dELiA*s Inc. Current
Report on Form 8-K dated May 2, 2000)
10.25 Amendment No. 3 to Employment Agreement between
dELiA*s Inc. and Christopher C. Edgar, dated June 9, 2000
(incorporated by reference to Exhibit 10.36 to the
dELiA*s Inc. Quarterly Report on Form 10-Q for the fiscal
quarter ended April 29, 2000)
10.26 Employment Agreement between iTurf and Dennis Goldstein
(incorporated by reference to Exhibit 10.13 to iTurf Inc.
Registration Statement on Form S-1 (Registration No.
333-71123))
10.27* Amendment Number 1 to Employment Agreement between dELiA*s
Corp. (f/k/a iTurf Inc.) and Dennis Goldstein
10.28* Amendment No. 1 to Amended and Restated Credit Agreement
among dELiA*s Inc. and certain of its subsidiaries and
Congress Financial Corporation, dated July 31, 2000
10.29* Amendment No. 2 to Amended and Restated Credit Agreement
among dELiA*s Inc. and certain of its subsidiaries and
Congress Financial Corporation, dated November 10, 2000
10.30* Amendment No. 3 to Amended and Restated Credit Agreement
among dELiA*s Inc. and certain of its subsidiaries and
Congress Financial Corporation, dated November 20, 2000
10.31* Amendment No. 4 to Amended and Restated Credit Agreement
among dELiA*s Inc. and certain of its subsidiaries and
Congress Financial Corporation, dated January 19, 2001
10.32* Amendment No. 5 to Amended and Restated Credit Agreement
among dELiA*s Inc. and certain of its subsidiaries and
Congress Financial Corporation, dated February 2, 2001
10.33* Employment Agreement between Evan Guillemin and
dELiA*s Inc. dated as of October 27, 2001
10.34* Modification Agreement, dated as of May 4, 2001, among
Allfirst Bank, dELiA*s Group Inc. and dELiA*s Distribution
Company
21* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
23.2* Consent of Deloitte & Touche LLP
- ------------------------
* Filed herewith
+ Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the SEC.